Jill Kerby

PART 3:  A SPRING REVIEW OF YOUR PENSION IS A ‘DECLUTTER’ PRIORITY

No matter how hard every Irish government tries to ignore the pension problems we have in this country, or to pass the parcel to the next administration, they simply won’t go away.

I attended at a major pension conference last week on the dire conditions of our state old age pension organised by the Society of Actuaries and the think-tank, PublicPolicy.ie.  The most salient and ironic comment made was by the retired head of the Pensions Board (and PublicPolicy.ie director) Anne Maher who said, “If we had undertaken the pension reforms recommended in the late 1990s or in the 2000s, we would not be here today.”

I remember well the first major report which started being compiled in 1993, the ground breaking and seminal National Pensions Policy Initiative. It’s most notable achievement – years later – was the introduction of the Personal Retirement Savings Accounts (PRSAs). 

Several other major studies have been rolled out since then, but the pension time ticks away, louder and faster. We are not the only country struggling to come to grips ageing populations and insufficient amount of funding. Back in 1993 we were in a perfect demographic position (with a very, very young population) so reform the old age pension, but 23 years later, we too are running out of road and now face a huge jump in the percentage of gross domestic product (GDP) needed over the next few decades if today’s young workers will see any benefit from their PRSI contributions.

Since this is the fourth article in our ‘Spring Clean/Declutter Your Finances’ series, you might want to know what kind of conclusions and recommendations were being bandied around at last week’s conference: three important reports were discussed, the substantive 2014 OECD Review of Pension Systems and two others, on Ireland, by the private consultants,  Milliman and McKinsey.

All three come to the pretty much the same conclusions:  Irish people are living longer, which is a good thing but they are not contributing enough to state or private pensions. Universal benefits are too high; deficits are growing and are becoming unsustainable. There is too much inflexibility around retirement rules.

The recommendations that have emerged are – and this is the good news – are varied, practical and do-able, but will take considerable political will and courage: retirement age has to increase to reflect greater longevity and improved health outcomes for older people; contributions have to increase if benefits are to be sustained for longer;  universal benefits, need to be reconsidered to improve more equitable financial outcomes for all pensioners. Incentives need to be considered to change attitudes in favour of working longer, but differently and   taxation has to be reviewed to stop incentivising early retirement.

This isn’t an exhaustive list. But if these key recommendations are ignored, the gap in Ireland between how much it currently costs up to fund the €12,131 per annum pension to 600,000 pensioners – 3% of GDP - will soar to over 9% of GDP by 2055 assuming our pensioner population more than doubles to c1.4 million over 65’s.

So if you have a state pension, lucky you.

Yes, you paid into it, as did your employers, a total of 14.75% of your annual salary.

But if you retire at 66 and live to be 86, you will collect (at the current payment) nearly €243,000 in benefits (and at least another €161,700 if you also claim for an adult dependent). Even if you earned the average industrial wage every year of your working life, the amount paid into the Social Insurance Fund (which is not exclusively for pensions) would have been far, far less than what you will collect.

Most civil and public servants who receive a final salary defined benefit pension (half salary, plus 1.5 times final salary as a taxable lump sum) will enjoy a greater income than if they received the State pension. But the people who will struggle most, are those members of defined contribution or self employed pensions who, on average will end up with private retirement incomes of between €3,000 - €5,000 per year.  Without the state pension, which represents c33% of the average industrial wage, many would be destitute.

Until governments start taking action on the funding and sustainability of ALL pensions, you need to:

-       Review your PRSI contributions. The eligibility rules keep changing. Will you have paid enough to claim your pension at retirement age?

-       Do you have a private pension? How much of your salary are you and your employer contributing? You should be allocating at least 10% of your gross salary…from the moment you start working.

-       Are you nearing retirement age, (say within 10 years)? Get an accurate assessment of what your fund is worth now and how much income and tax free lump sum that represents. Get a forward estimate as well.  Will it be enough, with the state pension, for you to live on?

If you are facing a pension income shortfall, get ALL your retirement provision reviewed by an independent, impartial adviser. See www.sfpi.ie for a financial planner near you.

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie

MORTGAGE COMPLICATIONS NEED CREATIVE SOLUTIONS

Do you have a complicated mortgage, one that needs to be de-cluttered or ‘spring cleaned’?

A very large number of mortgage holders – half of all home owners have a mortgage - probably fall into this category, judging by the 80,000 plus mortgages still in arrears and the 120,000 that have undergone restructuring..

The new government may be considering extending mortgage interest relief past its 2017 expiry date, which will benefit just over 300,000 mortgage holders to the tune of about €750 a year, but what it really needs to do to relieve the financial pressure on new buyers is to build thousands of new homes as quickly as possible.

An easing of the Central Bank’s lending rules would also provide much needed relief to the thousands of prospective buyers who are unable to buy high rent and save the required 20% down-payment on properties over €220,000.

The flip side of our highly dysfunctional market, however, is that prices have been rising across the country and are slowly bringing hundreds of thousands of existing mortgage-holders out of negative equity, freeing up some properties for re-sale. The challenge remains to find another suitable home to buy (or rent). 

Even with the improvements in the market – less negative equity, some improvement in the ability to pay – the rate of new borrowing is still very weak: with over 80,000 mortgages still in arrears and too many underperforming, restructured loans on their books, lenders are cherry picking only the best borrowers.

The long term risk is that any rise in interest rates – and there’s no sign of it at the moment - could blow apart many of the restructuring deals that are based on variable rate repayments.

That said, a lot of people who are not on tracker rates but who are making their repayments, are very unhappy with the cost of their mortgage commitment. Like the prospective first time buyer, they need to consider all their options.

Eight years after the great financial crash, some governments – like the UK - are re-introducing saving incentive schemes, tax relief or both, like the UK.  In the US, there is a dangerous drift back to sub-prime lending (guaranteed by federal mortgage agencies).  Here, with the exception of the tax relief for some existing owners, there are no such schemes to alleviate the funding pressure.

For new buyers who can put together the down-payment, the options are a standard variable rate that ranges from 3.3% to 4.25% (or 5.2% subprime with Pepper Homeloans) or a fixed rate (usually for one year) of c3.3%. (Existing owner fixed rate begin at about 3.5% for most lenders.)

Existing homeowners who want to move home or switch to a fixed rate face charges of c3.5% - 3.8%. (See www.bonkers.ie)

(Anyone with a tracker – and paying just .5 - 1% over the ECB base rate of zero should hold onto it for dear life and avoid fixing or switching providers. You will never be offered such cheap credit again.)

Mortgage brokers suggest that variable rates are more likely to fall than go up anytime soon, so locking into any fixed rate needs careful consideration. But every 0.25% savings per month on a 30 year loan amounts to a c€15 savings for every €100,000 borrowed, or €45 on a €250,000 loan (€540 per annum).  Switching to a cheaper lender – and this is where the best deals lie at the moment if you have a clean mortgage record – could result in an annual cost reduction of €2,160 a year if you can cut your mortgage rate by 1%.

Start the switching process by checking rates: www.bonkers.ie and www.consumerhelp.ie are two reliable websites. You should also review your mortgage protection and home insurance and make sure to check for better premiums as part of your switch.

First time buyers are especially badly served by the dismal to nil savings rates. This is where creative financial thinking comes into play.

Can you earn more?  Can you pay less rent by adding another flatmate or even rent a spare room in your apartment or house. You qualify for the  €12,000 tax free Rent a Room income even if you are a tenant(and you clear it with your landlord.)

Some brokers say some banks are not disqualifying borrowers who come with early inheritances or parental guarantees. Is there any chance of any early inheritance? 

Finally, one form of finance that is under-rated, but should be explored for putting together a downpayment is a private family loan.  In a world of negative net interest rates, a 20 year (albeit unsecured) capital and interest loan that pays 4% to a willing parent of other relative who is getting no yield on their savings could be the difference between getting on the property ladder and being a permanent tenant. Just make sure both parties get proper financial and legal advice.

Next week: Investment and pensions.

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie

FANCY A LITTLE SPRING DE-CLUTTER? LETS START WITH SAVINGS

What’s the difference between a ‘Spring Clean’ and a ‘Spring De-Clutter’ in my house?  The former is a noble aspiration. The latter actually happens, one step, and one room at a time.

Gradually, but steadily decluttering your finances may also be a more realistic way to get your wider financial position sorted out, though I still highly recommend a big, major wealth review at least once in your lifetime and usually triggered by three major events:  marriage, a house purchase and as retirement approaches.

But this column is about how to do a “Spring De-Clutter” and the best way to begin is with the financial issue or issues that you’ve been putting off, or that is causing you the most grief.  Judging from my postbag these include poor returns on savings; expensive and elusive mortgages; investment funds and pensions and long term funding for children’s education. I’m going to address each of these issues over the next few columns:

Let’s start with savings.

The legacy of the 2008 crash in this country is that not only are personal borrowing rates considerably higher than in many other EU countries, especially for mortgage loans, but Irish savers are also penalised by the wider, on-going policy by the ECB and other central banks to maintain zero and below zero base interest rates in order to “stimulate” moribund economies where borrowing is low and the paying off of debt by individuals is high.

The great fiscal stimulus hasn’t worked, though it has pumped up stock prices and other favoured assets of the super rich, like their incomes, share options, property and art. The rest of us are avoiding more debt, paying off existing ones and we’re saving more.  We’re also buying more precious metals, that, like cash these days, never pays a yield, but unlike cash, maintains it’s intrinsic value for the simple reason that it is impervious to the on going devaluation and debasement of paper money by central banks. (The intrinsic value of a paper (or even electronic) banknote is nothing more than the cost of the ink and paper.)

There is no easy fix for cash savings that are yielding no or nil returns. We are at the mercy of global central banks that have already introduced negative returns for their wholesale customers, who in turn may be considering charging their customers – us – for our deposit accounts. It’s also one of the less publicised reasons for why central banks are so keen to replace cash with electronic money – it will stop people from withdrawing cash and stashing it in mattresses and homes safes, which is an even worse consequence of their ‘stimulus’ campaigns.

But I do have a few suggestions on how to make surplus savings work harder:

-       Have a clear picture of how much savings you have – in your deposit bank or building society account, the credit union or post office. Does any single, individual account exceed the €100,000 bank deposit guarantee limit?

-       Use surplus savings, especially if it is earning nil net returns to pay off expensive debt – credit, hire purchase and personal loans. There is no point in paying a range of interest from 10%-24% per annum on any debt if your savings are only returning 0.24% gross. (Anyone with an incredibly cheap tracker mortgage (as little as 0.5% in some cases) will probably want to hang onto it as inflation is also steadily eating away at the capital repayment.)

-       If you can afford the time and effort, consider shifting some cash in and out of different deposit term accounts. Up to date savings comparison websites like bonkers.ie and the government consumer site, consumerhelp.ie show the best demand short and longer-term variable and fixed rates.

-       Investing some of your surplus cash will most likely produce a better return …over the longer term. Upfront costs and on-going charges are a drag on all investments, but this impact can be reduced if you choose low cost funds and take a realistic longer-term view and get proper professional advice.

-       Private lending. Any positive return from savings needs taking a risk. Lending a portion of your surplus savings to a family or friend runs the risk of default that may be difficult to foreclose – even if you create a legal contract. But charging a grandchild 4% for college loan, for them to buy a much needed car to get to work, or even to buy a home, is still 4% more than you will get from any bank.

-       Ditto for peer to peer lending in which you bid to lend money to small companies who need modest loans, usually €20,000-€30,000 that they repay with interest over three years. Average returns are c7%-9% according to Irish P2P lenders, www.LinkedFinance.com.

-       Consider exchanging some paper currency for real money - gold or silver.  (See Goldcore.com for details and costs. Check out their monthly Goldsaver Account.

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie