Jill Kerby

WHEN A GENERAL FINANCIAL SPRING CLEANING ISN’T ENOUGH…

I have a hugely ambitious younger friend, the mother of three children, who I will call Louise, who is emboldened by the fact not only is her house now out of negative equity, but she and her husband have also finally, voluntarily come off the mortgage forbearance plan they agreed with their bank.

Four years ago, they were in danger of losing their home, a four bedroom semi-detached house they bought in 2005 near Lucan, Co Dublin. They had moved there from a smaller, Dublin city terraced house in Fairview, their first home, which had simply grown too small when baby number three arrived. They made a significant profit on its sale, but still had to take out a €400,000 tracker mortgage on the spacious, modern house in Lucan.

And then the crash happened. And then in 2010, her husband lost his job. (She works for the HSE and became the only breadwinner for nearly two years.)  They eventually fell into serious mortgage arrears, borrowed money from both sets of parents, wracked up serious credit card debt. Eventually, with the assistance of a good financial adviser they came to an agreement with their lender: they’d pay interest and capital on one half of the loan, a small amount of interest only on the other half.

Four years later, they’ve reverted to paying the entire mortgage again. They are both earning good salaries again, and having “taken our finances by the horns” are far on the long road to financial stability.

My friend and her husband are the post-2008 success story that I relate when people ask about whether it’s possible to see the proverbial ‘light at the end of the tunnel’, amidst a personal finance disaster.

For many unfortunate people the crash did mean losing their homes, either voluntarily or involuntarily. But foreclosure figures remain comparatively low in Ireland and even halved in 2016, compared to the previous year, all the while over 33,000 are still in two or more years of payment arrears.

MABs, private financial advisers and the official insolvency service have helped tens of thousands of debtors and their homes. Even the nuclear option – bankruptcy is now discharged in just one year.

My friends came close to tossing the keys back to the bank, before they finally went for proper, professional help (something, I helped steer them to.)

Anyway that was then, this was now. “Mark and I have decided we’re going to have a really nice holiday – here in Ireland – in August with the kids. We’ve found a fantastic summer rental place in West Cork and my sister and her family are going to share it. But we figure we need €2,500 for the two weeks – our share of the rent, food, surfing classes for the kids, pony rides, eating out, fishing trips, the lot. And we don’t have it.”

I knew I wasn’t being squeezed for a loan; this couple have determined to live within their means (or as close to it) so no more credit cards, no more unnecessary borrowing; no more “unthoughtful” spending:  when they filled out the Standard Financial Statement, the form required by their bank as part of their debt restructuring, they discovered that they’d been spending as least €50 - €60 a week on takeaways and other fast food, “because we’d come home tired from work or a bit later than usual and after picking up the kids, we couldn’t be bothered to cook.” Towards the end, that was another €3,120 going onto their credit cards.

My friends are very careful spenders. They have a budget. They DIY everything they can, from car and home maintenance, gardening, and even haircuts for the kids. They still treat themselves and their children, but they only after they pay all the bills and most important put away regular savings into credit unions accounts and their pensions.

“At first I thought we were being very self-sacrificing,” said my friend. “We were swallowing our pride by admitting that we just couldn’t keep up the pretence of being ‘well off’. But we had huge credit card bills even when we earned €150,000.”

The toughest realisation, she said, “was when we realised it was always a pretence. We were in serious trouble with debt and incredibly stupid lifestyle choices before the crash. It got worse after 2009 – we nearly broke up.”

So what’s up now, I asked? 

“We’ve both decided to spend nothing for 30 days, so we can get up to the €2,500 we need for the holiday. Aside from food and the usual bills. Not. A. Penny.

“You always say you’re looking for good personal finance stories. And that you’re always spending too much.” (I do, but I only spend MY money.)

“I want you do to it with us.”

Stay tuned.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

SO YOU THINK WATER CHARGES ARE GONE? THINK AGAIN…

Did you pay your water bill? Are you entitled to a refund?

A million Irish households paid the controversial water charges with some customers paying up to €325 or a total of c€325 million.  According to the Housing Minister, Simon Coveney, the state then paid €89 million to approximately 890,000 households in the form of the €100 annual water conservation grant. 

Now that the politicians have agreed that there will be no future water charges and that water expenditure will come of out of general taxation – and assuming that deal is approved by the EU Commission - the logistics around the refund scheme will be complicated and slow. Not every household paid the same amount (my household didn’t pay the fourth water charge instalment and didn’t apply for the conservation grant). Another c1.3 million households refused to pay any water charge but some received the €100 grant, as this was presented as a universal payment. Will they be required to refund the €100?

The Minister has said that there has to be fair treatment for everyone so you probably shouldn’t count on any refund too soon, even if you could use the money urgently. This isn’t just because of the administration complications or the response of the European Commission but because there still needs to be some clarification about how the government intends to pay for the c€400 million repayment.

Optimists in the Department of Finance are already hoping that tax revenue will pick up again for the rest of the year (after less than stellar returns last month).  If revenues soar in Q2 and Q3 it may be sufficient to not just meet this huge refund but enough to also the usual multi-billion euro HSE over-runs, the Children’s Hospital construction over-run, the cystic fibrosis drug costs and potentially large compensation payments to mother and baby home claimants.

If the current Revenue surplus estimate for this year does not improve, and all the promised Budget ‘17 spending allocations are made, there won’t just be much to give away in Budget ’18 next October and the Government, which is very close to balancing the Budget for the first time in nearly nine years, will be forced to undertake more borrowing than was intended for 2018.

Irish Water has been a fiscal and political disaster from the start with massive staff and cost overruns. Other costs have soared – for security and legal challenges and parliamentary investigations.  Millions more may still have to be paid in fines to the EU.

The political ‘return’ from the Irish Water disaster will only be known in the next election, but someone is going to have to pay for the higher ongoing water costs and the most obvious sources of revenue will be businesses, via higher general rates imposed by local authorities; higher direct income taxes; a new flat percentage levy on higher earners like the Universal Social Charge or even a water levy added to local property tax, which has been frozen until 2019.

Imposing either a new water Social Charge on higher earners and the self-employed earning more than €100,000 is already a successful tax policy or a  water levy on property, paid directly to the Revenue Commissioners with their impressive, wide-ranging powers, in particular the sending of the Sherriff to your business or home, could be very tempting. Property owners are already extremely compliant (as are employers) and would simply have to adjust their respective payments to the Revenue.  

Last year it was estimated that Irish Water would need €5.5 billion or about €1.2 billion a year for operating costs and investment. Only about €700-€750 million would have been raised from household water charges so adding €1.2 billion to annual borrowings for water services isn’t going to happen if the Exchequer’s plan to return to surplus by 2019 stays on track. (The gross national debt is €204.77 billion with interest payments alone expected to be about €8 billion this year.)  A water USC charge or LPT water levy of €1.2 billion is far more feasible.

If you don’t think so, just remember that between 2011-16 the Minister for Finance collected €2.4 billion in cash from the retirement savings of just over 800,000 private pension holders. It was easily collected because the pension companies were threatened with significant cash penalties if they didn’t pay over their customer’s cash to Revenue.

Water services will be paid for one way or another. Not by people whose income comes from welfare payments or who earn less than €17,000, the cut-off for USC. The easiest way to bring in €1.2 billion will be to force employers to deduct it at source or to add it to fearful property owners tax bill.

And if you have a problem with that…you can just take it up with the Revenue.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

BANKING SERVICES DISAPPEARING ALONG WITH CASH

It’s hard to imagine a less consumer friendly sector than banking (water utilities perhaps?)

Nine years after the bank collapse, revelations continue about how the retail banks treated their mortgage customers. The Central Bank is now in discussion with the Gardai about the personal culpability of individual bank officials in what is now being alleged to be the outright theft of c10,000 low cost tracker rates from as early as 2006, though few expect any successful charges and convictions.

Meanwhile, bank and post office branches continue to close – Ulster Bank being the latest to announce another 22 branch closures and 40 post offices are slated for closure. This past week another bank cut its savings rates in the relentless downward spiral to zero or even negative returns.   

The bank closure campaign is happening everywhere. On-line and cashless  banking is now the ultimate intention of global financial institutions (perhaps with the exception of Irish credit unions which have always lagged behind technologically) in order to drastically reduce costs and rebuild their shattered balance sheets.

Fighting against the new IT dynamic is probably fruitless, at least so far as private banks are concerned and consumer campaigns should really be directed at keeping post offices open, but with expanded services that ideally would include acting as bank proxies and in encouraging the advancement of credit union services.

Until the credit unions are restructured, with their bad debts and bad lending practices fully purged; re-training and mergers completed, and there is a proper roll-out of essential banking services (current and saving accounts, debit and credit cards, on-line access to accounts, mortgage as well as business and personal lending), bank customers in villages and towns where closures are happening have little choice but become proficient on-line banking customers.  Depending on where they live and the availability of ATM machines or merchants that allow cash top-ups on purchases, most of their purchases will probably also be cashless.

Not everyone is comfortable with cashless banking – but the cost and risks associated with cash-dispensing post offices means that even pensioners and social welfare beneficiaries are going to have to get used to cashless services. (Cashless is already the norm at KBC Bank which doesn’t even accept cash deposits.)

Meanwhile, last Friday (April 7) KBC Bank was the latest bank to cut its demand interest rate, dropping it to 0.05% from 0.15%. 

It is hard to believe that this is still one of the higher deposit rates on offer: Bank of Ireland, AIB and Ulster Bank have reduced their demand rate to zero and 0.01% respectively. You might get a fraction percentage higher if you open an on-line account only, say with RaboDirect that is offering 0.04% but no matter what extra fraction of a rate you get, the automatic 39% DIRT (unless you earn pension incme of less than €18,000 of an individual or €36,000 for a married couple) will leave you with an insignificant return, even on a substantial deposit.

In a recent blog, the excellent bonkers.ie which compares deposit and current account rates, noted that a demand rate of 0.05% means that someone putting €10,000 into such an account will earn interest of just €5 at the end of 12 months. The 39% DIRT tax means you get a net sum of €3.05. At 0.01% interest the person with €10,000 on deposit would earn a laughable €1.

Bonkers.ie suggests that a flexible, strategic approach is the only way to achieve any kind of return. “Despite the continuing cuts, there are still decent returns available, if you know where to look and are willing to adapt to certain restrictions,” it reports. “For example, EBS’s Family Saver Account currently offers a [annual] rate of 3.00%, but it requires you to contribute monthly and has a maximum monthly contribution of €1,000.

“For lump sum savers, the rates aren’t as attractive, unfortunately. At the time of writing, KBC's 12-month fixed rate account is offering a return of 0.80%, which will give an after-DIRT return of €48 on a lump sum of €10,000 locked away for a year. Permanent TSB is offering a 0.75% rate for lump sum savers.”

State Savings products should also be included in your list, but is it worth locking in your money to achieve a slightly higher fraction of a return?  For example, the current tax-free annual return on the 4 year National Solidarity Bond is just 2% or 0.5% per annum. The 10 year Bond pays a cumulative tax free rate of 16%, or just 1.5% per annum.

You may not feel comfortable about voluntarily giving the Irish state the loan of €120,000 for 10 years (the maximum amount an individual can leave in this Solidarity Bond) but the State promises to pay a net return of €2,400 (€600 per annum) plus the €120,000. Something no bank or credit union can match.