Jill Kerby

NEED CHEAPER MOTOR INSURANCE? SHOP AROUND FOR A NEW QUOTE OR A NEW BROKER

A friend of mine, a very spry widow of 74 who recently returned to Ireland after many years living in New Zealand, is having a problem getting a new motor insurance quote for her brand new Volkswagon. A minor claim a few months before leaving NZ (and another one a couple of years earlier) has resulted in her being refused cover here.

She explained to me that in New Zealand where she had insured her no-claims bonus against relatively small claims she thought nothing about reporting the accidents to her insurance company, knowing it wouldn’t have a huge impact on her next renewal quote.  “Had I known it would result in me not getting motor insurance once back in Ireland I would have paid the cost of these repairs myself.”

She now has to wait for at least three insurers to refuse her a quotation before she can appeal to Insurance Ireland to find her an accommodating insurer. Meanwhile, she’s dreading how much the premiums will be.

Exceptional cases like this one show just how complicated insuring your car can sometimes be…and how expensive. 

Unfortunately, the option of shopping around for my friend – even for third party, fire and theft cover - no longer exists and the recent Motor Insurance Comparison Survey from the Competition and Consumer Protection Commission which has shown quite a disparity of premium quotations between insurers will only be of theoretical use to her by driving home (no pun intended) just how much more she will be paying for her cover.

The survey once again reveals that importance of shopping around for motor insurance. The potential savings, said the Commission “vary depending on the level of cover required and the individual’s circumstances, but for comprehensive cover the difference in quotes received was found to be between €156 and €1,249. For third party fire and theft the difference in quotes ranged from €137 to €975.”

At the high end, these are huge savings, not unlike the kind available by shopping around at every renewal date for private health insurance.

This survey compares motor insurance quotes from eight insurance providers based on nine different driver profiles – which vary in age, location, driver experience and factors like how many penalty points you have.  Your gender – being a woman - no longer makes any difference (since the EU Gender Directive of December 2012) in achieving a lower quotation.

So how much would a 67 year old, Dublin owner of a 2 year old Ford Fiesta (with two penalty points) would save €170 by shopping around.  At the other end of the spectrum of car values, a 38 year old dentist, driving a €40,000 Lexus in Co Meath would save €484 on her comprehensive insurance by seeking out for the lowest quotation.  And a 25 year old teacher from Kilkenny with a six year old Nissan Micra could save €514 by shopping around for the lowest third party, fire and theft quotation on the market, albeit with a €300 excess per claim.

(You can find all the profiles here: http://www.consumerhelp.ie/index.jsp?p=106&n=470&a=1124)

As this survey shows, it isn’t just that some motor insurance underwriters calculate risk differently and this is then reflected in their quotations:  it is that some clearly are not very interested in covering younger drivers, or drivers with penalty points, or those who like my friend are not accident free for a number of years.

Insurance brokers tell me that, depending on their pattern of claims, insurers will hike the price of cover for certain cars (boy racers beware!), geographical areas and of course how willing the driver is to take on a higher co-payment – the dreaded “excess”.  The higher the excess, the lower the premium and this applies for nearly all types of insurance, including house and health insurance.

Meanwhile, engine size, a petrol or diesel car, how long you’ve been driving (let alone your age) and whether the car is securely parked indoors at night or left out on the road can ultimately influence how much you will pay for insurance.  Even your city neighbourhood can influence the price of your car’s insurance. Paying in instalments can add up to a whopping 20% to the cost.

Over the years I’ve found it doesn’t take too many other quotes to convince my long-standing insurance company to match the best quote I’ve collected for the same level of cover.

But if you don’t even want to go to that much trouble, call a good, reliable motor insurance broker and let them do the work for you. If they don’t get you a reasonable premium every year, then you can always shop around a new broker.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

BUDGET POINTERS FROM GEORGE OSBORNE TO MICHAEL NOONAN

Are there some pointers in George Osborne’s Budget last week that our own Minister for Finance Michael Noonan, should consider as he prepares his own pre-election ‘give-away’ Budget for October?

With UK unemployment 5.75% and still falling, its economy growing by growth at 2.5%, inflation below the target 2% and debt to GDP fallen to c80%, the British Chancellor was in an enviable position of being able to hand over some tax and savings breaks.

With just five weeks to go before the general election (and Labour and the Scottish Nationalists in coalition mode) it was inevitable that most taxpayers and savers would be rewarded.  And how!

The personal income tax allowance (on which no tax is paid) rises to £10,600 (€14,749) this year, to £10,800 (€15,027) in 2015/16 and to £11,000 (€15,305) in 2016/17, taking another four million people out of the tax net. 

The 40% tax rate rather than 45% (there are 3 bands in the UK: 20%, 40% and 45%) will apply to incomes up to £42,700 this year (instead of £41,860) and up to £43,300 in 2017/18. This will reduce the tax bill for 27 million people.

The Irish tax system works on a different, tax credit method of calculation with Irish workers paying far lower, flat social insurance contributions of 4% on all income compared to UK earnings related rates that go up to 12.5% in the UK. up to 12.5% PRSI in the UK.

However, the combined tax/PAYE annual tax credit for a single person here is just €3,300 compared to the €14,749 equivalent in the UK. An Irish worker earning €50,000 a year (or £35,936) will get to keep just €31,694 of his earnings after all tax, USC and PRSI is deducted.  His UK counterpart earning the equivalent of €50,000 (£35,936) will get to keep the equivalent of €38,097 (£27,523) once his tax and PRSI is deducted.

Determined to boost savings and investment – the only sustainable method of wealth creation for any state (or individual) – the UK Chancellor also announced that from April 2016, lower rate (20%) taxpayers would no longer pay any DIRT tax on interest of £1,000 earned on deposit savings. Higher rate taxpayers can earn up to £500 interest, tax-free.  From April 2016, the DIRT will be eliminated for anyone who has savings and pays the standard, lower tax rate.

Here, a 40% DIRT rate applies on all interest earned from savings unless you are over 65 and your total income is less than €18,000 (€36k for a couple.)

Meanwhile, the amount that UK residents can save every year in their ISA’s – individual savings accounts, on which all interest or investment growth can be taken tax-free (subject to terms and conditions) has been raised from £15,000 to £15,240. 

There are no tax-free returns available from any savings plans in Ireland (except the annual growth in pensions). Osborne also introduced a new ISA scheme, every similar to our old SSIA scheme, for first time property buyers which will attract a generous (and no doubt controversial) government top up on total savings of up to £15,000.

Finally, the UK Budget further liberalised their private pension regime:  it had already been flagged that from April 6, anyone aged 55 or over with membership of an occupational defined contribution pension or a self-employed version, could have full access to their money, whether they were still working or not. They could take 25% of it tax-free and pay their highest tax on the encashed balance, or they could re-invest the balance or leave it with the occupational fund. (See MoneyTimes, February 11 edition for how this affects Irish holders of UK pensions.)

Last week the Chancellor announced that retired DC members, who up to now had been forced to buy an annuity – a pension for life – with their pension fund (something that was abolished here a few years ago) could now sell their annuitized pension for a cash equivalent.  The lump sum would be in lieu of the annual income they would otherwise receive for the remainder of their life.

There is considerably speculation about the kinds of conversion payments retirees will get for their annuities: the cash equivalent may not be sufficient to give up the guaranteed pension payment.  But there will certainly be some retirees who will prefer the lump-sum, with which they may use to pay off expensive debt, mortgages or even use to buy an asset that they believe will pay more than the pension – such as a buy-to-let property.

Will Michael Noonan consider any of these reforms?  Will he have any money with which to do so?  We’ll have to wait and see. But savings and pension reforms – like eliminating DIRT tax and giving people more access to their life savings would go some way to pumping real money – not credit and debt - into the Irish economy, and no one can argue with that.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

COMMUNION WINDFALLS CAN HELP KIDS MEET € MILESTONES

First Communion and Confirmation season inevitably raises the subject of what children need to know about money, as all those €20 and €50 notes start flooding into them 79from doting relatives and neighbours.

In my city centre neighbourhood, the 8 or 12 year old that hasn’t raked in at least €800 is considered “a saddo”, a youngster, who lives up the street, told me.

(When I asked her what she was going to spend her windfall on, she said.” she I’m going to upgrade my iPad.”  And people wonder how Apple became the richest company on the planet.)

There’s an entire book to be written about the social, educational and intellectual merits of young children buying their own electronic devices, but I’m more interested in their financial intelligence.

Being handed the equivalent of an adult’s gross weekly wage for undergoing a religious ritual that also incorporates many of the trappings of an adult wedding (complete with white gown/lounge suit, meal and entertainment) could easily give an eight year old the wrong impression about money.

Hopefully most parents damper down the thrill of all those cash-stuffed cards at the end of the big day, by pointing out that money usually has to be earned through hard work, only then to be saved, spent and given away.

Children who don’t get that Communion night bedtime speech – and some other rudimentary instruction about earning an allowance and opening a child friendly credit union or post office account – have a much higher chance of turning into just the kind of over-spenders and ill-informed credit borrowers that makes the financial services industry very rich.

So in the same way that your child or grandchild is expected to meet certain physical and social milestones -  such as reaching a certain height and weight, verbal communication and physical tasks at different ages, so to is it a good idea to expect that our children reach certain financial milestones.

For example, while no one would expect a two or three year old to have any concept of money or spending, by the time they are five or six, they are usually aware of how their mammy or daddy has to pay the lady or man at the checkout for the groceries or goods they are buying. 

These days, many children believe the payment mechanism is a plastic card; too bad, since counting out old fashioned euro notes and coins is a better visual message. A five or six year old, who gets a 50 cent or one euro coin for the chores they do at home every week can understand that 50 of those euro coins or notes – for groceries – is a lot of money, money that mammy and daddy spent many hours away from home to earn before they could be spent.

By the age of 10, children will understand the concept of savings accounts and the reward – more money in the form of interest – that comes if you delay your spending by handing your money to the deposit taker for safe-keeping. (Fractional reserve lending is a story for later.)

Teaching the idea of delayed gratification is probably one of the most useful lessons any of us can learn.

Our society is where it is because deficit spending – at all levels – became the norm and not the exception. The concept of “living within your means” seems very old fashioned and children pick up very quickly that their parents are users of credit when they hear them say, “Ah, sure, we can’t really afford this (treat/ takeaway/toy), but we’ll just put in on the old credit card.”

By 15, every child who is following their school maths syllabus should understand the concept of compound interest as it applies to both savings and debt. 

That €800 Communion money, growing at say an average of 4% per annum gross for seven years will eventually be worth about €1,058. But they should be even more impressed at how a pension contribution of just €80 a month for 40 years, earning a 4% gross compound return, will be worth over €94,500.

On the flip side, the 15 year old who appreciates the merits of prudent saving will be horrified at how a €100,000 mortgage with a 4% compound interest repayment rate will cost nearly €171,869 in interest and capital if it is repaid over 30 years and heartened by a bill of just €145,435 if the buyer chooses a 20 year repayment term, albeit one that requires a higher monthly payment.

Breaking bad money habits is always a lot tougher than maintaining good ones.

Parents need to teach, and better still, abide by good money habits themselves, such as regular savings and careful budgeting.They also need to remind their child of the difference between “needs” and “wants” by saying, “the old iPad still works fine. You can replace it with your savings when the battery eventually dies out completely.”

By age 15 a teenager who has been given this basic financial instruction should have their own bank account; they should be saving up for things they really really want (presuming their ‘needs’ are being met by their parents) and they should be ready to start earning their own money outside the family with part-time and summer jobs.

We’ll look at the milestones that should be met by age 30 in another column.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

PENSION QUESTIONS FILL UP THE POSTBAG

Ms MC writes:  My mother worked in Scotland for a number of years, many moons ago and as such is in now in receipt of a monthly pension of £134.52. Would she be entitled to any savings from the new UK pension rules that come into effect from next month or is there someone she would need to contact in the Pension Centre in England to check her entitlement?

It sounds as if your mother is receiving a small old age pension from the UK government for the years that she worked and paid social insurance contributions. The new Pension Freedom Day rules from next April apply only to people who were members of private, occupational defined benefit (“final value”) pension schemes. They do not apply to people who are or worked as public or civil servants or automatically apply to anyone who worked for a private company that operated a defined benefit (“final salary”) pension scheme.

I’ve received quite a lot of mail from Irish people who worked in the UK and contributed to state and private pensions. If you qualify to get early access to a paid-up or frozen UK pension fund you will have to deal with your ex-employer or pension provider. Then take professional independent advice.

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MR PG writes: I was employed for 11 years by a cross-border government agency set up under the Ireland Fund. When I retired in late 2010, I received a pension worth €428 a month. I’ve contacted the administrator in Belfast to see if the pension fund is accessible to me under the new UK pension rules that come into effect from April 1, but I was told, no, as I was a resident of the Republic. My union, SIPTU confirmed this.  Is this correct?

It sounds like you are already receiving your pension, possibly purchased for you via an annuity for life, from the proceeds of the fund by the trustees. The changes to UK pension rules (which I wrote about in this column last month) mainly apply to people from age 55 who are not yet in receipt of their defined contribution, private (not public service) pension. The new rules allow the DC fund holder to claim 25% of the DC pension fund tax-free and draw down all or some of the rest of the money, or reinvest the fund.

I don’t think your residency is relevant in this case. It might be a problem from a tax perspective for other Irish residents, who once worked in the UK and left behind their DC pension funds (for collection at retirement) if they wish to encash their UK pensions from age 55. But this is only because neither the UK nor Irish Revenue have issued guidance notes yet on how the UK money will be treated for tax purposes in both jurisdictions.

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MrsTC writes: Mr 31yr old daughter is single and working, but on a low income. We intend to help her get a pension started by giving her a tax-free gift of €3,000. Can you recommend a website that will explain to her about her pension funding options?

What generous parents you are: €3,000 is a good start to a 31 year old’s first pension, but the size of contributions she can make and claim tax credits will depend on how much she earns and the type of pension she joins. If she is a sole trader/self-employed and opens a PRSA or other private pension, she can only make maximum contributions of 20% of her net relevant earnings between age 30-39.  If she earns €30,000, she can invest up to €6,000 in a pension this year. If she belongs to a company pension, or operates a limited company, these age contribution limits don’t apply and larger tax deductible contributions can be made. Her company can explain how that works if she is an employee; a good pension adviser should be engaged if she sets up a PRSA or her own company to explain how these pensions work.

My guidebook, The TAB Guide to Money Pensions and Tax 2015 has an extensive chapter about pensions, or she could go onto the Pensions Authority website that has a useful archive about pensions as well as an interactive pensions calculator.

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CMcV: I recently came into some money and would like to give my parents a gift of €100,000. Would tax need to be paid on this and as they are both nearing retirement age would it have any effect on their pensions? Are there any other implications that I should consider?

The tax-free gift/inheritance threshold between a parent and child is €225,000, but the limit when the recipient is a parent (or sibling, niece or nephew) is just €30,150. You could give them each €30,150 (€60,300 in total) after which they would each have to pay 33% capital acquisition tax, ie. €13,101 on the remaining €39,700. However, to avoid paying this tax, you could gift them the €60,300 tax-free and every year thereafter give them each a maximum €3,000, the annual amount that anyone can give another person entirely tax-free. It would take about six and half years of such gifts to use up the remaining €39,700.

Finally, if your parents’ state pensions are means tested, the large lump sums, or income they may earn from them, may effect the size of their state benefits. It might also push their joint income over €36,000, the tax-free income threshold for over-65s. They should consult a tax adviser or the Department of Social Protection.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

DON’T BE A FINANCIAL VICTIM: ARM YOURSELF

“Is there any financial product or service that doesn’t come with a downside?” a friend as ked me last week at lunch. 

She and her husband, she claims, have been “burned” a few times – first when they bought an endowment mortgage back in the 1980s, which they cashed in at a loss when they moved house about six years later.

Like so many other people, they’ve been suckered into adding payment protection insurance to some small bank loans and credit cards. Luckily, because her husband has always been self-employed (and not eligible to claim the PP benefits) they’ve been compensated as part of the recent Central Bank investigation into payment protection misselling.

Most recently, they’ve been discouraged by what appears to be poor returns on their private pensions, not to mention the yield on their savings in their bank and post office accounts.

Bad product design, poor or non-existent regulation and high sales commission and taxation have all conspired over the years to feed into the perception and reality of consumer dissatisfaction and bad value.

When mixed with a low knowledge of investments in particular but money ad finance generally by most of the adult population (let alone within the broker community) and it isn’t surprising that so many people are either unhappy with or suspicious about the value of their savings and investments funds, the mortgage they bought, the pension they contribute to.

I answered my friend by saying that I could only think of one financial product that had no downside:  the Special Savings Incentive Account or SSIA between 2001-2006.  We saved up to €200 a month for five years into a savings account or investment fund and the government topped it up with a 25% cash payment – or €50. Any deposit interest or investment growth would be paid tax-free if the account was left untouched until maturity. Anyone who saved the maximum amount – and €14 billion was saved – would enjoy their windfall, tax-free.

If there was a downside, it was that the working poor, who couldn’t afford to save much or anything, ended up subsidising those who did: the scheme cost the taxpayers €3.5 billion in top-ups alone by the end of 2006.

Everything else comes with both downsides…and upsides.  The financial industry is no different, though consumers could be more confident that there is always an upside if they knew the playing pitch on which they will meet the manufacturer and seller, was more level and was being properly refereed. Unfortunately, that isn’t always the case.

So I passed on a few rules of engagement to my friend about the purchase of any financial service product, so that your chances of being duped or disappointed are reduced:  

-       Understand your financial needs and then prioritise them between protection products (life, health, income, goods); savings and investments; a secure roof over your head and retirement.

-       Shop around. Compare similar products – for example, the yield and terms of a bank deposit accounts vs state savings vs the credit union. Do the same for life, health, travel, motor, home and pet insurance.

-       Always read the contract.  Never sign one you don’t fully understand. Except in cases of deliberate misselling, most people could avoid poor value if they took the time to understand the contracts and did the following:

-       Always ask about costs, charges, sales commissions, fees, penalties, exclusions (in the case of insurance) and how the charges/ sales remuneration impact on the immediate, ongoing and final value, especially of investment funds. Get your answers in writing.

-       Aim for impartial, independent, fee-based advice (financial, legal and taxation) when buying ‘big-ticket’ financial products like a mortgage, pension, or lump sum or regular investments.

-       Learn about risk and reward. They come in different guises and degrees:  a deposits may appear safe, but there is still the risk of taxation (41%-45%) inflation (the loss of spending power) and confiscation (remember Cyprus?)  Investment rewards usually exceed deposit yields but are at risk of the market place, geography and politics…and the actions of central bankers. All risks can be mitigated by time, patience and diversification.

My friend knows that insurance, for example, is a good thing. Its downside is that you may never need it and all the money you have paid in will appear to have been for nothing…until catastrophe strikes.

All mortgages are a burden, even the cheapest tracker… until they are paid off and you own outright a valuable asset.

All investments and pension funds will disappoint if time and money – compound interest - are not permitted to do their magic.

Funding a 20 year retirement needs a lot of time and a lot of money. Getting the best value – the upside – from financial products and services needs care and attention and a bit of luck.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.