Jill Kerby

IN SERIOUS DEBT?  WOULD YOU QUALIFY FOR A BIG MORTGAGE WRITE-DOWN?

Reports of huge mortgage debt forgiveness and repayment settlements at AIB – with amounts in excess of €200,000 being written off - is giving some people real hope that the light they see at the end of their own financial tunnel is not a fast travelling train, but instead a well lit space from which they will emerge.

Two of the three AIB reported cases involve the Irish Mortgage Holder’s Association, representing employed couples with children and a single, working woman with a child.  In each case nearly half their huge mortgage debts were written off with the customers able to keep their homes. No interest or capital repayment had to be made on the relatively small amount of debt parked under a split mortgage arrangement, that would only be paid at the end of the term or sale of the property. 

Their remaining personal, unsecured debts may be subject to other creditor arrangements I was told, possibly including formal DSAs (Debt Settlement Arrangements under the insolvency legislation). These too would likely involve more debt forgiveness.

So how does one qualify for these write-downs? And more importantly, since most of the other banks still insist they do not have write-down policies, will the Central Bank or government intervene to pressurise them to do so?

The IMHO, which is paid by AIB (with subsidiaries EBS and Haven) and now, by KBC Bank to act as a go-between with up to 2,000 and 350 of their most difficult mortgage arrears cases respectively, has successfully completed 250 settlements with AIB. Another 250 are in progress.

Over 40 of the AIB cases have included some debt write down ranging from as little as €2,000 to €215,000.

The IMHO’s David Hall has said that the huge debt write-offs cases are “exceptional” – not necessarily because of the size of the mortgage or even the size of the arrears, but rather because the bank itself found that the writing off the debt concerned, combined with parking another portion under a split mortgage, proved to be the best deal for the bank.

It was a combination of all these criteria, plus large amounts of negative equity that allowed the bank to conclude that forcing these owners into other forbearance measures, like interest-only payments, extended repayment terms, 50/50 split loans or even voluntary surrender, would result in a worse financial outcome for the bank.  In the end, foreclosure, repossession and resale comes at a substantial legal and administration cost of any bank.

The pragmatic solution – which only happens to benefits the debtor - can be the best solution.

So who is the most likely candidate (aside from being in serious arrears and negative equity) for this kind of debt write-off?

Clearly, AIB customers are at the top of the queue for the moment, and possibly KBC Bank ones now that they too have engaged the IMHO’s services.

But no matter your bank, you need to show the ability to repay a restructured, debt reduced repayment schedule, which means you must have steady, relatively safe, income.

The total cost of repossession and resale of the property has to be unfavourable enough to indicate to the bank that it serves their purpose better to restructure with a debt write-down and get you off the ‘most difficult’ list.

The bank must also be satisfied that if they do not provide a truly sustainable arrangement in place, the risk of you going bankrupt is also high (or inevitable), which will return them absolutely nothing and still leave them with costs around the repossessed property.

Other financial advisers and debt managers are making informal debt deals and restructuring mortgages with the banks, even if but AIB (and now KBC) deny they are doing any write-downs as a matter of course.

Some of the other well known debt advice organisations include NewBeginnings.ie; NeoFinancial.ie and Bankruptcyadvice.ie, the latter of whom offer bankruptcy advice on-line or in person to mortgage holders who cannot secure an insolvency arrangement of any kind.

What is clear is that creditors and debtors appear to want to avoid the cumbersome, time-consuming and in some case, more expensive formal personal insolvency arrangements (PIAs): the Insolvency Service has issued fewer than 50 DSAs and PIAs since November.

Fewer bankruptcies are happening than expected – for now –for the some of the same reasons: it is expensive and can result in no financial gain when the only real asset is a negative equity property.

If you haven’t sought help with your serious mortgage arrears do so, either through not-for-profit groups like IMHO where the banks are paying the costs, or professional fee-based advisers. Check out your formal insolvency options at the ISI.ie

The government’s is unlikely to force widespread write-offs by all the banks.  You need to be proactive by seeking assistance and acting in your own interests.

Doing nothing may have worked up to now, but it won’t forever.

INERTIA STRIKES US ALL:  A FINANCIAL REVIEW WILL DELIVER SERIOUS SAVINGS

The last time my husband and I sat down to formally review our finances was in 2002 when he took a voluntary redundancy package from his employer, a national newspaper.

We were able to clear our debts, do some much needed home renovations and decoration and boost The Child’s education fund.  On the advice of our financial adviser we also took out new life and income protection policies that would mature in stages as we approached retirement and The Child’s third level education was complete.

Twelve years is a long time to go without a new review. The fact that we have no outstanding debt to worry about, especially mortgage debt is our excuse and the fact that we meet twice a year with our pension adviser.  Yet the income and tax squeeze of the past few years and especially the soaring cost of health, education, fuel and transport costs has taken its toll on the discretionary spending we used to enjoy.

What prompted our latest, long overdue review was Danske Bank’s announcement that it is pulling out of retailing banking; along with 150,000 other customers, we had to find a new bank.

I settled on Ulster Bank and at the instigation of my new bank Ulster Bank manager, I agreed to do their standard financial review. As regular readers of this column know, I always advise the use of independent financial advisers when making important investment decisions, and that hasn’t changed.

But opening a new bank account, applying for a new credit card, is an opportunity to a) meet your bank manager (my new bank still comes with a branch and staff) and especially a chance to check not just the cost but the content of every direct debit or standing order that you have on your account.

On-line banking and the persistent move towards on-line banking means that more and more of us have our salaries, pensions and other income paid directly into our accounts. Loan repayments, utility bills and other household payments are arranged electronically.  We don’t always pay much attention to the regular debits.

We hadn’t actually reviewed all those policies that were set up 12 years ago and we’d lost track not just about the size of the benefits, but the staged maturity dates which were to reflect the fact that The Child was getting older and that we would be getting closer and closer to retirement.

As my new bank manager took me through all our household expenditure, he prompted a number of questions that I couldn’t answer on the spot about that list of clearly quite expensive direct debits.

“Do you know exactly how much the benefits are worth?”  “When do these policies mature?”  “This one appears to be indexed.” Do you know how much life and protection insurance you really need now, after all these years?” 

(He also reminded me that I hadn’t checked the rebuild value of our house for a few years – or why I was still carrying so much contents cover on goods that were clearly depreciating since the cover was first arranged. It’s the kind of information you should have when property insurance is about to renew.)

Completing the Ulster Bank financial review (which also looks at investments and retirement planning, so do make sure to get a second opinion from an independent adviser as well) proved a revelation.

We may have no debt, but we haven’t really been in control of our discretionary spending and we frequently drift off budget. 

More importantly the insurance review showed that we were mostly wrong about maturity dates and benefit values and that our changed financial circumstances – and the healthy performance of our pension funds - mean that we won’t need as much expensive life cover for as long as we originally anticipated 12 years ago.  The savings we will make adjusting this cover will save us over €1,000 a year.

Last week Irish Life published its latest life insurance benefits review. It paid out an average of €500,000 a day last year in term life insurance benefits to deceased customers and €225,600 every day in specified illness insurance benefits.

Yet fewer than half of all adults have any life insurance, reports the industry, a serious omission for anyone with dependents. The average benefit to those deceased customers, who presumably have dependents, was just €65,560.

For the record, Irish Life can sell a healthy 30 year old non smoker over €250,000 level cover for 25 years for just €20 a month, but check with your broker for the best price for your circumstances.

Carrying too much insurance as my husband and I have discovered, can be a costly mistake, but not as potentially costly as having too little, or none at all. I’ve misspent my money on worse things.

But even with all my inside knowledge, I probably wouldn’t have adjusted these expensive contracts without that review. 

MAYBE A COMFORTABLE RETIREMENT MEANS ‘A MAN IS A PLAN’ AFTER ALL

Anticipating International Women’s Day last week, an article in a national newspaper with the headline ‘A Man is not a Plan’ quoted a new book on wealth creation for women.

The gist of the book’s message was that if we women could just get our personal finances right, we too could end up like “fashion legend” Donatella Versace, “beer heiress” Charlene de Carvalho-Heineken, “the Russian businesswoman” Elena Baturina, and “widow of the late Apple founder Steve Jobs”, Lauren Powell Jobs.

Really?

With the exception of Baturina, who started her first technology based company in 1989, and whose subsequent construction firm flourished during her husband’s tenure as Mayor of Moscow, these ladies are all part of family dynasties or inherited their money.

Without those family or marriage links they may have become independently wealthy, but the experience of the vast majority of women in the western world is very different. Most women still take up paid employment and often interrupt that employment (and income and wealth accumulation) for family reasons.

Their long term financial prospects can be precarious without a shared income from marriage or partnership and the payment of state retirement benefits.

If you want to become fabulously wealthy, a global family business, marriage, inheritance, and rising to the top job in a global business (Sheryl Sandberg) is the usual route for women. In more rare cases, that wealth is self-created (Oprah Winfrey, Sara Blakely of Spanx) or even won (think lottery (Dolores McNamara).

For the rest of us, the aspiration to become “well-off” or financially independent (especially by retirement) takes more well-trodden routes, such as building a successful company or entering a high paying profession or industry with considerable financial perks (like shares), security and government patronage.

The hardest way is to start early and build your wealth with a combination of good financial habits that yield surplus earnings that are well invested over a long period.  For women, this path is easier if you share it with someone else – a husband or civil partner in order to share his/her income and assets including a pension.

Two wages really do stretch further than one in this country where married employed couples/partnerships enjoy far better tax treatment than single people or couples with only one salary. Two pensions also stretch much further in retirement (four, if dual state pensions are paid.)

On the subject of pensions and women, two financial services companies also used International Women’s Day to remind us how most women in this country will not be counting on private retirement income of their own when they retire.

Standard Life’s survey showed that while 79% of the working women they spoke with claimed to have some kind of pension scheme, on average they save just €240 a month or €2,880 a year, but expect to need the equivalent of €40,000 a year on which to live comfortably in retirement. (The average woman’s private pension pot at retirement, says Standard Life, is just €45,000.)

Since €45,000 will only produce an annual income of €2,000 (or €38.46 per week!) and you need a pension of fund of €500,000 to achieve an annual pension of just €26,000, the working women of Ireland are clearly delusional.

A woman of 20 needs to save €240 into a pension every month for 45 years to achieve a €26,000 income in retirement, said Standard Life’s Aileen Power. (Only 6% do so.)

Saving and investing as early as possible was emphasised by IFG’s head of pension investment, Samantha McConnell.

“When asked about their idea of what retirement means [women under 35] think of a time which is fun, filled with holidays and, specifically, not having to work,” she said, “Which poses the question, ‘how do they expect to fund for this expected lifestyle’?”

McConnell thinks young working women can’t start soon enough, and certainly no later than their mid-to-late 20s. The longer they leave, the more by way of lifestyle choices they will have to forgo if they want to play pension catch-up in their 40s or 50s.

 By then, often with mortgages, other debt and children to finance, it can be too late (even for both partners) to fill the funding gap. Difficult choices, like having to keep working much longer, or even to sell their only asset – their home, if they own one – may have to be made in their 60s or 70s.

The simple truth is that a comfortable retirement, let alone a comfortable working life, is only possible (outside of marrying well, inheriting and lottery wins) if substantial income – and surplus - is generated that can be saved and invested to accumulate income-generating assets.

 Aspire away to the fabulous wealth of Donatella, Charlene, Elena and Lauren, but they really are in a league of their own.

NO NEED TO HAVE A HEART ATTACK OVER THE COST OF UNIVERSAL HEALTH INSURANCE… NOT YET

The only good thing about the 2019 deadline set by the government for the introduction of Universal Health Insurance (UHI)…is that it’s still five years away.

A lot can happen in five years and there’s no point in getting ourselves into a tizzy about a still to be determined new household expense that is still years away.

As it is, most of us are too busy focussing on how we can afford today’s health costs, like the price of a GP visit (if you don’t have a medical or GP-only card); the €100 for an A&E visit; €75 for every night spent in a public hospital (maximum 10 nights); the €144 prescription a family must pay each month before the state drug plan kicks in; the €2.50 per prescription item for medical card holders and the huge and soaring cost of private health insurance premiums – now averaging over €1,000 - for the 2.1 million PHI members.

Nevertheless, the UHI debate needs to get underway.

The Department of Health White Paper is expected out very shortly.  Everything you’ve heard or read about the new insurance costing €1,600 per annum or €5 billion on top of the current €13.6 billion public health costs and the €2 billion for private insurance, is just speculation. (Reliable sources say no costings are included in the Paper.)

The real starting point for this White Paper and the ensuing debate has to be: how can a small, heavily indebted country with a seriously dysfunctional two tier health service, dominated by the Department of Health/HSE turn itself into a world-class, efficient, affordable service that produces better health outcomes for everyone?

If that is not the ultimate goal of this huge and undoubtedly expensive shake-up, then the entire exercise is going to be just another scandalous waste of money and time.

So where do we start?

How about in recognising that the current two-tier system is no longer working. The costs are out-of-control on both sides (that is, they exceed available income and resources) and the flawed, community rated private insurance model is being destroyed by the imposition of new charges, higher levies and the loss of tax relief.

The government also needs to recognise that UHI needs all stakeholders aboard to work out the best plan possible – including representatives of the 20 existing private hospitals, private medical practitioners like GPs, consultants and others, private health insurers and critically consumers. None of these groups are currently represented on the Department of Health’s implementation group that has been in operation for two years.

Rumours and speculation suggest that the plan is to bring in a UHI system that will cover a minimum contract that covers all GP, primary care and hospital costs. There will be no jumping treatment queues. The speculation is that there may be co-payments for drugs, and that we will have to buy a supplementary policies for semi-private or private accommodation and ancillary treatments like physiotherapy, dental care and even infertility treatment. 

According to healthcare expert Dermot Goode of www.healthinsurancesavings.ie this speculation is based on the Dutch UHI model, with the exception of trying to buy a private room with supplementary insurance. Enhanced accommodation does not exist in the Netherlands, main because they never operated the public/private hospital system.

A proper universally insured system here, said Goode, needs to be specific to our unique circumstances, and “is going to need taxpayer and stakeholder support from the start.” Already, he said, there is resistance by GPs “who have not been consulted” about the introduction of medical cards for the under-6s. A properly running, efficient UHI system will not function without their wholehearted support, he suggested.

As for the rest of us, the Government needs to get the right UHI road map in place if they expect the nearly two million or so taxpayers/PHI members to subsidise what appears to be as many as 1.5 million people whose incomes are reportedly too low to afford the universal insurance. (Yet if the Dutch model is the template we follow, that subsidy is not automatic, said Goode, but is means-tested and must be applied for on-line.)

Perhaps the most difficult task for the Government will be to convince taxpayers who are neither medical cardholders nor PHI members – reckoned at about a million people - that they too will have to pay for UHI from 2019.  Reasons for not having insurance range from it being unaffordable (for hard-pressed families and those in debt) to unnecessary (the young and healthy).

It has also been speculated in recent weeks that the Irish state will resort to the Dutch model and confiscate the UHI premiums directly from their wages or savings of the non-compliant.

Let the great debate begin.  Let us start as we wish to finish.

WHAT THIS ECONOMY REALLY NEEDS IS A BUMP

The Bump.

Not the bump in the road.  Not the baby bump. Not a bump on one’s head, but rather a retail concept where the seller gets their customer to go that extra euro to buy another item or extend or upgrade the service they purchased.  It’s the selling device that made low cost Ryanair’s turnover soar. Grocery stores too are the grand masters of bumping. bumpers.

You’d think getting a bump and grind working in Ireland would be a priority for Irish retailers too, what with spending still just a fraction of what it was before the 2008 crash.  Yes, there’s been a modest rise in spending in the last six months, but that’s more a testament to the fact that the great Irish economic downturn is now nearly seven years old and that in that time stuff that was getting old, broken, out of date and no long fit for purpose (like a lot of computer gear). This stuff needed replacing.

There are also new jobs being created – about 40,000 in the past year - and these new employees and newly re-employed people are beginning to make up for lost time.

So where’s the bump?  Where’s the spike in microwaves to go with the new dishwashers?  The new carpet to go with the new sofa (that was so saggy it wasn’t worth respringing?)  The metallic finish for the new car (that replaced the 12 year old one.)

Our 21st century Irish economic model doesn’t only just need steady consumption, ideally funded with debt (say the sage economists and politicians) but it also needs that extra bumping to ensure that we not only have our needs fulfilled, but also our ‘wants’.

So it might help if retail and services industries focussed on who has money and is more likely to be tempted to spend even more of it if they were targetted better.

In a perverse sort of way – since I don’t buy into consumerism quite as enthusiastically as a lot of other people – I don’t see much evidence of Ireland’s biggest cohort of debt-free, asset and cash rich consumers, the 50 and 60 something’s and older pensioners figuring very large in the campaign to get the country spending again.

Not only are they not being bumped…they’re practically ignored if you exclude SpecSaver ads and the Over50s Shows.

Just for the record, according to the CSO, there are nearly 100,000 more people aged 55 - 75 in 2013 than there were in 2008:  806,300 versus 707,900 with 404,500 being women (in ’13). Meanwhile, nearly 90,000 mainly younger people emigrated in 2013. Nearly 35,000 of those were in the 15-24 age group.

The fall in the younger population is striking, yet there has never been any shortage of goods and services being designed, promoted and advertised at this debt-free cohort. If anything, the marketing world is black with account executives who reflect the age and interest of their favourite, target audience; they not only anticipate their every desire, they also convince them that those desires are eminently affordable, whether in a high street boutique, a big department store chain or on-line.

Maybe I’ve missed something but it doesn’t seem to me that anywhere near the same effort has been made to snatch a bigger share of the rapidly growing ‘grey’ euro – the Baby Boomer generation that has access to a vastly more powerful spending pool that the heavily indebted Generation X or the Millennials. It is the Boomers, not the Millennials who own much of the €100 billion in savings accounts and €80 billion in pension funds.

Baby Boomers are the most entitled and demanding generation ever. They downsize by choice and purchase less, but they can afford to spend more. Age often brings discernment, though I’m still waiting I’m still waiting to see a major Irish fashion campaign on capsule wardrobes for my age group – ideally in silk, linen and cashmere.

A lot more could be done to get purse strings loosened starting with the government committing itself to reducing high personal income taxes, wealth levies like the €2 billion pension levy and the annual health insurance levy which is nothing more than a subsidy for their own unregulated, undercapitalised health insurer, the VHI.  (Note to government:  this is also the secret to getting the rest of the population spending more and to more job creation, too.)

The biggest disincentive to older people spending their income and savings - the latter is down to about 8% per capital of disposable income after being nearly twice that a few bleak years ago - is the high cost of government services like energy, health, education, transportation and local government and the fear of high long term care costs.

With every earned extra euro over €32,800 now being taxed at 52% (and 55% for self-employed earnings over €100,000) any reluctance by working Boomers to spend is an understandable reaction to the financial mugging they’re getting at the hands of government and the realisation that retiring is going to be more aspirational than attainable if it doesn’t stop.

Yet the spending doldrums among older and mostly financially unencumbered consumers isn’t entirely the fault of government or the youth-obsessed advertising and marketing agencies.