Jill Kerby

HOW SAFE ARE YOUR SAVINGS UNDER THE BANK GUARANTEE SCHEMES?

By the time you read this the fate of Cyprus will have been settled and from my current vantage point it looks like its depositors will be taking a substantial loss of their savings – perhaps only over €100,000 – as well as sacrificing some of their gold reserve, private semi-state pensions, a higher corporation tax and other concessions.

What the Cyprus parliament overwhelmingly rejected they may very well accept with some amendments, but the alternative would be to probably have to leave the eurozone, though not the EU itself.

Whatever the outcome from today (Tuesday), the Cypriot banking and financial services industry, a less successful version of our own IFSC – is finished.  Trust and confidence, the lynchpin of banking simply no longer exists there.

The capital controls that (I expect) have been imposed in Cyprus to stop a rush to transfer savings out of the country means it will take a long time to restore that confidence. Faith in the sanctity of the euro itself, and the credibility of bank deposit guarantees will certainly be shaken in the rest of Europe too.

It is this element of the Cyprus crisis that savers need to address here, especially those with sums over €100,000 in AIB, Bank of Ireland, ESB and Permanent TSB. Many of them now have their own critical deadline to consider – the end of the Eligible Liabilities Guarantee on Thursday, March 28.

Money left in term accounts for up to five years in qualifying ELG covered bank deposit accounts have been 100% guaranteed and will continue to be until their five year term ends.

However, any funds that are no longer under the ELG from Thursday must act to otherwise secure them as well as they can.

The standard €100,000 deposit guarantee scheme (DGS) is still in place, but (as in bankrupt Cyprus) the Irish state does not have sufficient money in the Central Bank’s €388 million deposit insurance fund, in which banks make a paltry 0.2% contribution every year, to honour losses of up to €100,000 if an Irish bank ever did fail. There is currently €102 billion in household deposit accounts. 

Also, it has now emerged that thousands of depositors in IBRC (formerly Anglo Irish Bank) who invested in tracker bonds with capital guarantees, but which had not matured before the recent liquidation of IBRC – have discovered that the guarantee for the first €100,000 of their money has not been honoured. Others, who bought Anglo Irish 5-6 tracker bonds (some as pension products) and even invested far more than €100,000 have lost huge sums. Total IBRC deposit/tracker bond losses, could amount to €93 million, €15 million lost by Credit Unions members who bought the trackers through their local CU branch.

The ELG will end on Thursday but the following options should be considered by ALL depositors:

-       Be aware that all deposits and pension funds could be targeted as part of future EU bailouts for insolvent banks or member countries;

-       Capital and currency controls could be imposed in any EU country and not just Cyprus, to stop people transferring out funds (despite the EU principle of free and open trade.)

-       Aim to leave your savings in the most solvent or highest investment grade institutions possible. No Irish banks qualify, but investment grade deposit takers include Danske Bank, RaboBank, Nationwide UK and UlsterBank.

-       The €100,000 deposit guarantee is only as good as the ability of the bank or the Irish state to stand over it, as IBRC depositor/tracker holders have discovered to their cost.  

-       All savings are at risk from taxation. Since 2009 DIRT has risen from 20% to 33% and from next year will be subject to 4% PRSI increasing the total tax to 37%.

-       All savings are liable to inflation risk: the spending value of your savings falls as inflation rises – this is a hidden tax.

-       Most financial advisors consider a 5%-10% holding in gold/silver will act as a hedge against the risk of taxation, and currency/capital debasement by central bankers to save bankrupts institutions and savings. (Check out www.goldcore.com).

Worried savers in Portugal, Spain and Italy as well as Slovenia and Malta, also due bailouts have been already moving their money out of the reach of their politicians/central banks. Yet, there are few currencies considered particularly “safe” anymore and all banks are lowering interest rates. Bonds are not particularly safe anymore either, warn advisors as that price bubble intensifies.

Anyone concerned about the safety of their cash or their pension funds should seek an independent fee-based financial review from an experienced advisor and aim for a solid, long term, diversified asset and maybe even geographical solution that suits their age, risk profile and needs.

If there is one rule we should learn from the Cyprus, where the bank crisis has been festering for a year, it is procrastination is the worse response of all. 

NEW DEAL OR BAD DEAL FOR INDEBTED HOMEOWNERS?

“The worst thing is not knowing if the bank is going to keep extending the interest-only payments,” the young mother of two, said. “We can just about pay the mortgage interest, but they keep us in the dark until the last minute about whether they will extend the interest-only for another three months.

“The house is worth, maybe €250,000, though we bought it in 2007 for €550,000 when we were both working. We know four other couples on the estate just like us, with less income now and huge negative equity. At least one of them is now over 90 days in arrears.

“We really like the house, but we will go into arrears if the ECB rate goes up, and especially if we lose our tracker.”

Between now and the end of this year, six participating banks - AIB/ESB; Bank of Ireland/ ICS; PTSB; KBC and ACC but not subprime lenders, local authorities or Danske Bank (which has the lowest number of arrears of all the banks) - will have to offer a “long term and sustainable” repayment plan to at least 50% of their customers like Laura and her neighbours.

This might include long term interest only repayment terms, an extended repayment period, long term split mortgage in which up to 50% of the capital (which may include arrears) will be “parked”, ideally interest-free and in some low income/value cases, voluntary repossession that may include debt write-off, a tenancy or rent to buy option.

The split deal will involve the customer only paying capital and interest on the other, affordable, half of the mortgage, but how long such an arrangement continues will depend on the customer’s own financial circumstances, how soon the property market recovers or whether the house is sold.

What happens to any shortfall once the property is sold, or at the end of the repayment term, is still not clear but the CB hinted last week that some relief of the remaining debt might be possible.

Meanwhile, changes to the existing arrears code of conduct will allow the banks to finally foreclose on investment properties, on strategic defaulters and those who are clearly insolvent, though such customers can also pre-empt this by applying for a Personal insolvency Arrangement in an effort to remain in the family home. 

Consumer advocates and insolvency practitioners say that this ambitious new plan to clear the arrears logjam will only work if all the customer’s debts - unsecured credit cards, personal loans, utility arrears – are also taken into account.

So what should you do now in light of this new development if you are in arrears or in forbearance, or worried that you might be moving in this direction?

-       You can wait for a new offer from your lender, or you can be proactive and write to them now and request one.

-       If you have unsecured debt that is a problem, or could result in you falling into (or deeper into) arrears with your mortgage, arrange to see a MABS official. Complete the financial statement available on their website, www.mabs.ie  If you are insolvent –your debts are greater than all your income, savings and other assets including the house - a 5-6 year Debt Settlement Arrangement (DSA) or Personal Insolvency Arrangement (PIA) may be the better solution that one of these CB interventions. These involve the writing off of unsecured debt (which for many people is what they need most) and some secured property debt. You can download a guide to the new insolvency and bankruptcy rules here: http://neofinancialsolutions.com/insolvency-guide-published/

-       Don’t stop paying an existing agreement with your lender or stop communicating with them. The banks are getting the go-ahead to start foreclosing on such ‘strategic defaulters’, even those who argue that they had no choice but to pay the grocery, light bill or car loan first. Buy-to-let defaulters should expect very little mercy.

-       If you are eventually offered a “sustainable” deal, take up the government offer of a €250 session to talk it over with an accountant (see www.keepingyourhome.ie ). However, you are the only one who can decide if another ‘extend and pretend’ debt deal is really in your long term interests or that of your family. Is this really the house you wish to remain in, perhaps for the rest of your life, possibly with no equity to show for it after 30 or 35 years?

-       A PIA (in which you might keep your home) or even bankruptcy will be painful, but it could be the correct solution for the hopelessly insolvent. If you decide to file for bankruptcy, your home and other assets – car, jewellery, shares, some personal goods will probably be sold to repay creditors, but if successful you will be discharged, hopefully at the end of three years, entirely debt free.  Free to start over. 

DON’T MISS SAVINGS DEADLINE FOR HEALTH INSURANCE

The steady increase in health insurance premiums has caused more than 60,000 people to drop their insurance in the past year, many of them younger members who are so important to the sustainability of the ‘community rated’ system by which everyone can purchase any health plan here, regardless of their age.

The latest price hike round involves

VHI increasing their rates by up to 8.5% on certain plans on March 1; Laya increasing some of their plans by up to 16.4% from April 1; Aviva increasing most of their plans by up to 6.4% from March 31 and GloHealth, the newest player, increasing their plans by up to 9.6% by from March 31.  All four providers have already increased their premiums from 3%-12% between last October and this past January. 

Dermot Goode of www.healthinsurancesavings.ie is adamant that anyone who has not reviewed their health plan in the last three years is paying “shockingly high” premiums in 2013, having been hit by one increase after another that may have raised their bill by as much as 135%, yet their provider probably has brought out equivalent, cheaper plans during that period.

Cheaper equivalent or near equivalent plans are still available, says Goode, but you need to know which ones are which (not easy with over 250 different plans between the four insurers) and ideally, the names of the corporate plans, which are often discounted to individual ones, but not advertised for individual users.

The insurers now all operate annual contracts that lock in the member for 12 months, but in the case of Laya and Aviva, says Goode, this lock-in “only came into effect from June 2012.”  Customers who are due to renew in April and May, “may be able to do a ‘stop and start’ on your cover to avoid the next price increase for a further 12 months, i.e. stop your current policy now and set up a new policy on the same plan on the current rates. 

“ You have 14 days after your renewal date to cancel or amend your cover.  After this, you could find yourself locked into an expensive annual contract and you could face financial penalties if you subsequently try and cancel the policy.  Therefore, it’s critical that you act on the renewal notice once it lands as complacency could cost you dearly”.

Comparing the price of two, popular plans offered by each company with two similar plans with the same provider, Goode has shown that the savings between 35%-46% can be achieved.

For example, a family of four – two parents, two children – who switch from their existing Laya Essential Plus (No Excess) plan to Laya’s Healthwise Plus No Excess plan will save a total of €1,947.32 or 46%. (You have until April 1 to switch.)

A family with Aviva’s Level 2 Hospital plan will save €1,286.60 or 38% by switching to Aviva’s Family Value plan. (You have until May 1 to take up this offer.)

Meanwhile, Goode says that GloHealth’s equivalent best value plan, Better Plan, which was only launched last July, costs, in total, €2,200 and also represents very good value for a family of four.

(VHI comparisons are not included here because the renewal switching deadline was last Saturday, March 9.)

Healthinsurancesavings.ie offer similar same-company comparisons for single people and older people, the latter, surveys show, are far less likely to cancel their plans than younger people. Older people also tend to buy more expensive policies, with greater coverage for outpatient and hospital treatment and better accommodation options.

While savings like the above are very significant, other cost cutting solutions www.healthinsurancesavings.ie suggest include, especially for families with very young children, switching providers.

Special child discounts that were all the rage last year with VHI, Laya and Aviva are now gone, says Goode, and only newcomer, GloHealth still allows all children under three to go free.

All parents should be reminded, that you are not obliged to keep your children on the same plan as the parents’ and that lower cost/accommodation plans are suitable in most cases because adult-style private or semi-private accommodation is not usually available in the children’s hospitals.

Meanwhile, Goode warns all members that from this month, the €65 increase in the risk equalization levy (to €350 per adult) and the extra €25 for a child (to €120) will not apply if your plan qualifies as a ‘non-advanced’ or low cost entry level plan with little access to private hospital treatment.  Unfortunately, this means that providers must eliminate benefits like MRI scans and other out-patient treatments in private hospitals from these plans.

“People with entry level plans will really have to decide whether it’s worth moving to a new ‘advanced’ plan, however basic that may still be the same price as their old one, but with the extra levy, or stay with their existing entry-level one and lose access to tests or treatments at a private hospital.” 

TOOLS FOR SELF-VALUEING YOUR LOCAL PROPERTY TAX

Every property owner will be receiving the local property tax (LPT) estimate and guideline from the Revenue Commissioners starting next week

Accepting the Revenue’s estimate means they’ll leave you alone once you’ve paid the tax (returns must be made by May 7 or 28 depending on whether you file by post or online; the half year payment must be made by July) and the valuation will last until November 2016. The LPT is being described as a ‘self-assessment’ tax, but rejecting the Revenue’s estimate and submitting a lower one could leave you open to penalties and sanction if it is rejected.

So how should you go about the self-valuation?

Mortgage brokers, financial advisors, economists and estate agents all say that it is difficult to assess the real value of any property in a market that is less than one-tenth the size it was before 2007-8. Mortgage finance, they say, is still extremely difficult to secure, the arrears problem is a price dampener, and a flood of foreclosed buy-to-let properties could be imminent, which could also have a negative effect on prices.  Outside of Dublin, prices are still falling, though at a much slower rate.

Nevertheless, there are ways to self-assess your property, they say, though not all of them may end up being included in the Revenue guidelines.

Independent Valuation

“First, anyone who submits a lower valuation than the Revenue’s, should get professional backup in the form of two or three independent written valuations,” said one advisor. “In Dublin that will probably cost you between €100-€150 for each one, maybe less down the country. It has to be worth at least €300-€400 in annual tax savings for it to make sense to do so.”

 He also suggests that you hire those who turn over the most property in your town or area. “This is never more important given the small sample of transactions these days.”

The National Property Price Register 

Next, check out historical sales on the new property register, which is most easily accessed via the www.myhome.ie website which also includes a simple tax calculator.

Prices achieved since 2010 are listed on the Registrar, but those recorded in the last six months or year are more representative. Prices can vary a great deal as your radius of study widens. The desireability of certain locations differs as does the size, age, condition and type of house/apartment.

Also keep in mind that while neighbourhood amenities are something that everyone shares and so should have the same weighting for LPT values, the fact that you happened to spend €50,000 on a kitchen back in 2006 may not have the same price value impact in this market than it did back then.

CSO Surveys

The monthly Central Statistic Office’s residential price index (go to www.cso.ie) surveys give a snapshot of monthly price changes and the annual price to date. Last January, for example, prices fell, nationally by just 0.6% but in the year to January, by 3.3%. In Dublin, prices rose by 0.5% in January and, in the year to January, by 2.1%.

 This survey, and annual ones like the www.daft.ie and www.myhome.ie county by county price surveys can also provide you with statistical data to back up a price fall, for example, if you believe that the Revenue may have not taken such data into account in their estimate of your home’s value.

Rental Values

 Professional landlords and investors use a mathematical formula that involves the rental yield of a property to gauge whether the asking price represents good value, and this is also a tool you could use to try and value your home.

 It involves taking the annual rent currently being achieved for a house or apartment in your neighbourhood or area (Daft.ie is a good source or go an ask your renting neighbour). Investors then multiply this amount by a factor that represents – for them - a reasonable period in which to recoup their capital.

Typically, this is 12-15 years.  For example, if you know that the property rents for €1,000 a month or €12,000 a year, when multiplier is done, a fair investment value might be between €144,000 and €180,000. Would the Revenue accept this formula for an owner-occupier?  Would a higher multiplier, of say, 20 (once a typical mortgage period) be more acceptable. Using our €1000 a month rent formula, the house would have a valuation of €240,000.

The Ronan Lyon’s Calculation

Last January, in the form of an open letter to the government, the economist and Daft.ie spokesperson Ronan Lyons (see www.ronanlyons.com )

published his own valuation model, based on previous site value/Land Registry data that he produced.

 “The starting point (a 3-bed semi-d in Louth) and then multiply it by whatever factors you need” and supplied in his county-by-country table.

 “In particular, pick your county or urban area, if different; and pick your property type and size. So for a four-bed bungalow in Sligo, the €108,000 starting point is multiplied by 0.875 (prices in Sligo relative to Louth), by 1.355 (prices for 4-beds compared to 3-beds) and 1.221 (prices for bungalows, compared to semi-ds). Multiplying them all together gives an estimate of the property’s value in Q4 2012: roughly €156,000.”  Try it yourself.

 “Valuing houses in this market is guesswork,” one property expert told me. “But this is about getting households registered and €500 million collected. It’s not about a proper source of funding for local authorities.” 

 Owner beware, indeed.

NO MAGIC BULLET FOR MAKING MONEY…NOT IN THIS ECONOMY

“I think I need to make some real money this year,” my friend said over our first New Year cup of coffee. “We’ve got €20,000 in savings sitting in the bank and we’ve got two kids who we hope will go to university some day. It isn’t going to be enough.”

Timing is everything, and that is certainly true for ambitious parents and children who end up short of both cash and time. 

Unfortunately, that sense of urgency has been the cause of so many people actually losing their money. (Especially if they leave education and pension planning too late.)

The investment industry knows this too and they take advantage of this failing by convincing desperate people that they have magic insights in order to get them to sign over their money and then, hey presto, reap the whirlwind of cash from their trading genius.

It’s easy to say and promise anything when you are trading other people’s money in the knowledge that no matter how the investment performs, you will still maximise your own remuneration by way of frequent and generous commissions and fees.

The financial markets are ruthlessly manipulated by just about everyone associated with them, something that ordinary punters are finally cottoning onto: existing regulation and the lack thereof, allows for the most appalling misselling of unsuitable products and services, the payment of huge opaque fees and charges. In Ireland, regulations even protect bad practise by imposing a six year statute of limitations on official complaints about products to the regulator: in other words, the bad guys get off scot free unless you can afford to take them to court.

The ultimate manipulator of the financial markets – and much business activity now – are governments and their creatures, the central banks which have a monopoly on the control, flow and price of the money that fuels all these distorted markets. When it is the state, and not a free market that ends up setting the price of anything, how can anyone tell if it is genuine good value or not?

The economic crash has exposed both the shortcomings of the markets – they are neither free nor fair – and the insider institutions that facilitate and uphold those shortcomings. (Like huge global institutions avoiding corporate income tax.) It’s hardly a secret anymore that nearly five years of monetary, fiscal and political interventions to save private banks, the cost to individual taxpayers burdened by their debts has been nothing short of catastrophic.

Nevertheless the profits, pay and bonuses being reported in the financial service industries at the end of 2012 now exceed the obscene payments that they collected before the great crash. It certainly confirms the old adage, if you want to make money from Wall Street, get a job on Wall Street.

Of course it shouldn’t be this way. All commerce, all financial and social interaction, should amount to noting more than two willing participants – a buyer and a seller – coming together to agree an honest price. You want the bread that I baked. I want the pair of shoes that you made.  How much bread/footwear can we offer each other to reach a fair and satisfactory deal?

If only it were so easy. 

My friend was right to think that she has to start thinking differently about wealth creation, if she has any chance of beating the system. It was a long cup of coffee, but here was the bullet point list of do’s and don’ts I suggest she consider in order to both make the most of that €20,000 education fund: 

1)    Making money requires knowledge.  Get educated.  This means finding out how stock markets and investment asset options work and then decide which route is suitable for you.  Start with Rory Gillen’s new book, 3 Steps to Investment Success.

2)    The investment route you take should be determined by the time frame in question; the target growth you want; the amount of risk you are prepared to take, the fees, charges and taxes that must be paid.  If you only have five or six years before you need the money, and you need it to double in value, you can’t leave it in deposit account. Realistically, money earning a 7% (!) net return will only double in value after 10 years. 

3)    Be realistic. There’s no quick or easy way to achieve high returns unless you are incredibly knowledgeable, lucky and/or you are an insider who makes the rules and have first go at ‘stimulus’ funds printed by the government or taxpayer’s money. (The tourist industry, says the government are the biggest recipients of the 0.6% of pension savings it confiscates every year from private sector workers.)

4)     Don’t travel with the herd, which is exactly what the financial industry count on in order for it to make their eyewatering fees and commissions. The herd is offered the lowest common denominator – pooled investment funds that are designed first, to make them lots of money, and hopefully not leave you with only losses. The idea of sharing losses with clients is unheard of and small retail clients are so used to poor returns that they are ridiculously grateful if they at least get their original money back when a fund matures.

5)    Follow the money.  Successful professional investors seldom invest their own money in pooled mutual funds targeted at the masses. They identify high quality assets, whether individual shares or large collections of shares (pooled in low cost Exchange Traded Fund vehicles, for example), and at beaten down prices.  They often have a personal ‘style’ of investing: they may be contrarians, attracted to unloved shares (with good track records, lots of cash on hand, low debt) that have fallen out of public favour.  Or they are trend followers – buying and selling shares based on their real-time performance.  Others only buy shares or funds of shares they understand, ignoring the market ‘noise’ about how wonderful this exciting new business or sector may appear to be. (Remember the dot.coms?)

6)    Speculating is not a dirty word. It isn’t ‘investing’ in the conventional sense of buying a quality asset to keep forever for its dividends or capital growth. (The Warren Buffet method, except that Buffet gets special purchase deals no ordinary buyer could ever achieve.)

Speculating isn’t the same as gambling – speculators learn to anticipate events (like massive money printing causing the price of gold to go up for 12 straight years) and to take advantage of all the poor or dodgy regulatory decisions and special tax treatments that favour certain industries to the inevitable disadvantage of others. These ‘edges’ give those companies competitive advantages and they make more money.  The speculators make money too.

7)    Learn how and when to take profits.

“So much for a straightforward answer,” my friend laughed.

“Sorry, but making money is never simple,” I replied.  “You asked what you could do to try and beat the unprofitable returns that deposits offer. This is how you do it. But there are no guarantees of success. Losses are a possibility.”

Unfortunately, my friend is not an entrepreneur. She positively blanched when I suggested that one of other way to make her €20,000 outperform a deposit account is to start a business and not automatically hand over 33%-36% of any interest or dividend to the state. (37%-40% from 2014 when a 4% PRSI charge is added)

I left her with this idea:  “You can take a risk and hand this €20,000 to a fund manager – a perfect stranger – in the hope that they’ll grow and return your money over the next decade, after they and the state take their cut first.

“Or you can go out and find a real person who you can meet and get to know who is already building a good company and would sell you a little share of it for your €20,000.  Every great company started exactly this way, raising capital from friends and family, many of whom became very wealthy indeed.”

Small acorns. Big trees.  Maybe even a doctor in the family some day.