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Money Times - September 13, 2016

Posted by Jill Kerby on September 13 2016 @ 09:00

 

THE PENSIONS FUNDING GAP IS GETTING WIDER

The dire financial legacy of the Celtic Tiger years for ordinary folk was greater than just lost jobs, negative equity mortgages and high levels of personal debt.

And while most Irish people are steadily reducing their debt mountains, the 2008 crash with surge in unemployment also had a devastating effect on the amount of deferred income being allocated to personal pension funds, according to the pension provider, Aviva. 

Our pensions gap – the difference between actual pension savings and retirement income expectations – has increased 38% since 2010. The same gap in the rest of Europe is just 6%.

According to Aviva’s latest Mind the Pensions Gap survey, the generation of Irish people who will retire between 2017 and 2057 are going to need to collectively save an additional €27.8 billion a year if they’re to enjoy a satisfactory retirement income to meet their perceived needs.

This means, on average, an additional €12,200 gross savings per annum or €1,017 gross per month. These figures take into account the payment of the State pension, but excludes tax relief on pension contributions.  About 47% of respondents believed they would need between half and 100% of their final salary for a comfortable retirement.

 

“This is the second largest savings gap per head of population in the eight EU countries included in the report,” stated Aviva. “The UK’s gap is the highest at €13,200 and Germany’s, at €11,600, ranks in third place.”

  

Given the existing level of personal debt, higher taxes, lower asset values and for younger workers, the high cost of rent and child-care costs, saving an extra €1,000 a month could be an insurmountable for many.

So do we need to lower our retirement expectations, or just be more creative about how we can match those expectations with financial reality?

First, this news about the financial pension gap widening isn’t as bad as the ‘average’ assumes.

As the Aviva survey shows, if you’re a 30 year old worker, your annual saving shortfall in 2016 is €5,100 gross (or €425 per month gross). It was just €2,500 gross in 2010 (€208.33 per month). (At 20 it is ‘just’ €4,400.)

At 40 the funding gap is currently €6,700 a year; at 50, €9,700 and at 60, the average Irish worker would need to put away €28,000 a year for five years to achieve 70% of their final salary level in retirement (including the current c€12k state pension.)

A younger worker, especially one with the decent employer to match their contributions could realistically fill the gap after tax relief is taken into account and even with only a steady 3% growth rate in their fund, could expect a satisfactory private/state pension income in 35-45 years time. But it would require them accepting that they still have to forego spending today in order to have the money to spend tomorrow – a very long tomorrow.

Essentially it means living within one’s means, and not on credit. Lifestyle adjustments, especially if the person aspires to home ownership, will be pretty drastic if they hope to have both a mortgaged home and a well-funded pension fund.  Even the latter might be interrupted if the worker also had to factor in years of costly child-care and education costs.

But will the government step in to bridge the gap between lifestyles that cannot include pension funding (due in part to their own policies) and a realistic retirement income for every retiree?

There is still no sign of it yet. Housing costs remain unaffordable for a large majority of young workers who have to pay higher spiralling rents or older workers who remain in negative equity or arrears.

There is still no universal pension scheme here – supported by Aviva – which would automatically enrol all workers and employers (public and private sector) who do not currently participate or operate an occupational pension.  Private sector workers continue to subsidise higher value, defined benefit pensions for public sector workers and politicians.

Nor is there any sign about how the government, as the third pension pillar, would help fund a universal pension scheme. There hasn’t been any government support for designating a portion of the hated Universal Social Charge to workers’ individual scheme funds.

Finally, there is no sign that the artificial manipulation of interest rates by Central Banks will end anytime soon, to allow fund managers a fighting chance to achieve real, balanced risk investment returns for pension fund members in the form of solid long term bond yields.

The reality today is that only a minority of well informed, prudent private sector workers who contribute sizeable amounts of deferred income into an extremely well run investment fund are going to enjoy a well endowed retirement in the future.

This is a crisis just as serious and just as great as the Irish health service or homelessness.  And it’s on its way sooner than you think.

(You can download a copy of Mind the Gap at www.mindthepensionsgap.ie )

 

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

 

 

 

 

 

 

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Money Times - September 6, 2016

Posted by Jill Kerby on September 06 2016 @ 09:00

 

INHERITANCE TAX SYSTEM NEEDS MORE THAN JUST TINKERING

Should inheritance tax-free thresholds be loosened in the next budget? Should childless people be free to leave larger sums to their nieces and nephews or even a ‘stranger’ who is dear to them?

These are some of the suggestions being made by Fianna Fail in the lead-up to the October budget, and one that’s sure to generate plenty of controversy.

Inheritance tax is one of those issues in Ireland – like property tax and water charges - that gets people’s blood boiling.

Most people I have spoken to over the years believe that having paid copious amounts of tax already on the cash or assets paid with cash that they wish to leave to their loved ones – income tax, VAT, stamp duty and property tax (where a family home or holiday home is being passed on) and innumerable sneaky levies, the government should only help themselves to a modest amount of the capital value of your estate upon your death.

Others, and they are a minority, believe inherited money is unearned, favours people who are already well off and therefore should be subject to confiscation by the state “for the common good”.

Here in Ireland, capital acquisition tax, it’s formal designation, has undergone quite a few changes in recent decades, with both the amount that can be inherited tax free as well as the band rates of taxation moving up and down in tandem with the strength and weakness of the national economy.

There is a growing expectation that the Minister for Finance will raise the parent to child inheritance tax-free benefit from €280,000 (raised from €225,000 in Budget 2016) to about half a million euro (still below the tax-free rate of €542,544 in 2009, after the financial crash).

This will reflect the rise in property prices over the past six or seven years, especially in Dublin. Property remains the single largest transferrable asset within families.

But one opposition party, Fianna Fail, is calling for the other inheritance tax thresholds to also be increased at least in line with the increase in the parent-child one. These include the threshold between siblings, aunts/uncles and nieces/nephews and between strangers, that is, people with no blood ties.

The tax-free CAT limits for these two final categories are currently €30,150 and €15,075 respectively. In 2009 they were €54,254 and €27,127.

 

But the reform argument should go further than that. Over the years I’ve received many letter from readers who are single or childless. Some are only children so have no siblings or nieces and nephews to whom the law would allow them to leave their estates partly-tax free.

These owners of a home or other assets for which they paid with (mainly) post-tax income say that while they may not have close family members, they do have “loved ones” – godchildren or close friends – that they would like to endow with larger sums of money upon their deaths. 

One reader, after last year’s same sex marriage referendum even made the point that “inheritance laws no longer discriminate against same sex couples. I welcome that. 

“But my husband and I were never able to have children. I am an only child and neither of us feel any obligation to pass on our estates to our siblings. Their children will be generously endowed by their own parents.

“But as a woman unable to have children, but with a godchild who I love like a daughter as her mother died when she was only 11, I feel it is most unfair that I cannot leave her a substantial legacy when I die.”

Rather than tinker with the tax-free thresholds, the entire capital acquisition tax system needs an overhaul.  In order to make the system more equitable the government could consider adopting a CAT system that taxes the estate, not the beneficiary, as applies in the USA, UK or Canada.

For example, no inheritance tax applies on estates worth up to $5.45 million in the United States, while the estate tax-free limit in the UK is only £325,000. However, in both the US and UK a liberal system of trusts and lifetime tax-free gifts will lowers the impact of the 40% tax rates in both countries, to beneficiaries.

In Canada no inheritance or estate tax applies but the value of the deceased person’s estate is subject to their income or capital gains tax rates on the imputed ‘sale’ value of their assets. Beneficiaries then receive their share tax-free.

Setting a €1 million tax free threshold to an entire Irish estate over which 33% CAT would still apply would certainly satisfy the desire of many people to leave generous bequests to non-lineal beneficiaries, and still “reward” the government.

As families and relationships change and evolve, so should our antiquated and arbitrary tax laws.  

Michael McGrath and Michael Noonan should both take note. 

 

 

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Money Times - August 30, 2016

Posted by Jill Kerby on August 30 2016 @ 09:00

 

WATCH OUT:  PENALTIES APPLY FOR ALL SORTS OF SWITCHES

Have you ever delayed cancelling a service contract because you’d have to make a penalty payment that would just cost too much?

Me too. I’ve delayed changing both broadband mobile and electricity/gas suppliers in the past because I was tied into those contracts – and would absorb too much of the savings I’d make leaving early. 

These are two of the most common contracts that Irish consumer want to change, but they certainly are not the most expensive to leave. 

Getting out of a fixed rate mortgage or investment policy can amount not to tens or hundreds of euro if you leave early, but thousands of euro.

In a recent survey, the price comparison and switching services company Switcher.ie found that about a third of us have no idea if an exit penalty would apply and 41% are unsure about the amount.

According to Switcher.ie, who investigated the actual cost of switching (see tables), energy companies, to give them their due make the switching costs “clear for consumers, with most suppliers charging a flat fee of €50 per fuel if a customer cancels within the minimum term, which is typically 12 months.”

It gets more complicated (as I discovered) when you try to switch out of a broadband and mobile phone contract and investigation “found that the majority of broadband and mobile phone providers will require customers to pay the monthly charge for the remainder of the term.”

Whereas a €50 or €100 (for dual fuel contracts) penalty might seem worth the effort if you can save up to €360 over the 12 months of a new, cheaper electricity/gas provider, the exit cost of moving your broadband and mobile packages – see below- can amount to up to nearly €300, which wipes out the advantage of the switch (not to mention the a sharp spike in blood pressure and hair loss, say legions of frustrated switchers.)

The combination of “costs involved, lack of transparency and understanding about exit frees” means that consumers will be at a serious financial disadvantage unless they make themselves more aware of what they are signing up to from the outset, say Switcher.ie. 

That should always be the case when buying big ticket financial purchases like mortgages and investment policies.

Anyone considering taking out a fixed rate mortgage needs to pay as much attention to the exit clauses as they do to the interest rate they will be charged:  breaking such a contract before the term is over can result in up to six months worth of penalty fees. (This might be waived if you switch to a higher variable rate. The only reason you would do this is if you were certain rates would go down over the remaining period of the old fixed contract.)

Unitised investment policies typically include exit penalties for the first five years of the contract and encashing early will often result in a capital loss of at least 5% in year one, falling to 1% by year five.  But many life and pensions companies also impose MVA’s or market value adjustment clauses which flatly decline to release your funds if there have been ‘detrimental’ investment conditions, say after a stock market crash.

Whether it’s a simple switch to a new electricity provider or an expensive mortgage. 

Read the contract. Then read it again.

 

 

 

Table showing early termination fee per broadband provider

 

Provider

Plan Name

Monthly cost

Early exit fee

Digiweb

Digiweb Fibre Broadband Unlimited

€49.95

€299.70

eir

Superfast Broadband & Off Peak Mobile

€62

€250

Magnet

Fatpipe Fibre 24

€41.99

No contract

Pure Telecom

Unlimited Fibre Bundle

€45

€150

Sky

Sky Fibre & Talk Freetime

€45

€206.16

Virgin Media

240Mb and Anytime World

€50

€200

Vodafone

Vodafone Home Essentials

€45

€270

 

Source: Switcher.ie - Data correct as at 22nd August, 2016. See table above – Early termination charge table based on broadband providers non-discounted basic entry level home broadband and home phone bundle. Comparison is based on a customer leaving the broadband provider with six months left on their contract. Magnet broadband bundle listed is a “no contract” package.

 

Table showing early termination fee per mobile phone provider

 

Provider

Early exit fee

eir Mobile

The remainder of the contract value

iD

No termination fee applied to plan / airtime however a 30 day notice period applies. Devices agreements are subject to balance being cleared / paid.

LycaMobile

No termination charges as Lyca Mobile operates on a PAYG basis

Meteor

The remainder of the contract value

Tesco Mobile

The remainder of the contract value

Three

The remainder of the contract value

Virgin Mobile

All outstanding Instalments on your Device/s in full, and all unpaid call and other usage and administration charges in accordance with your Pay Monthly Airtime Contract.

Vodafone

The remainder of the contract value

 

Source: Switcher.ie - Data correct as at 22nd August, 2016.

 

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

 

 

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Money Times - August 23, 2016

Posted by Jill Kerby on August 23 2016 @ 09:00

LESSONS FOR LEO: THIS IS HOW CANADA IS TACKLING ITS PENSION CRISIS

 

Is Leo Varadkar our Justin Trudeau?  At least when if comes to sorting out the pensions mess

Trudeau is the 44 year old Canadian prime minister who after winning the Canadian election last October, appointed a former head of one of Canada’s largest private pensions and employment benefits companies to be his new Finance Minister.

The appointment of Bill Morneau to the FinMin job is regarded as one of the most radical – and progressive – appointments ever in a rapidly ageing and indebted western country.

Inadequate pension provision, as we know from our own experience is a deeply unpopular subject and something most politicians try to avoid tackling head on since just about every resolution to the problems besetting the three pension pillars – the state old age pension, private/occupational pensions and public sector workers’ pensions – involves some degree of financial pain.

Since government monetary policies (and too much regulation and red tape) are also part of the bigger problem of poor ‘safe’ investment returns, there just isn’t enough appetite for the kind of radical, structural reforms that are needed if today’s younger generation of workers will see any return from their compulsory social insurance contributions.

Trudeau, being one of the youngest PMs ever, knew that without further reform to the pension system generally, but to CPP in particular (which began in earnest in 1997) there wasn’t going to be sufficient retirement income for his generation to collect in 25 years time.  Minister Morneau opened talks in early Spring with the provincial premiers.

Next month, Leo Varadkar, our Social Protection and Pensions Minister is expected to announce that this government will introduced some kind of mandatory auto-enrolment pension scheme for workers who are not already in an occupational or self-employed pension scheme like a PRSA. (Personal Retirement Savings Account.) 

Company-based, such a scheme will result in every new worker being signed up with contributions made by the worker, unless they go to the effort of opting out, by the employer and the state. This money (and if the UK’s Nest auto-enrolment scheme is anything to go by) will probably be no more than a few percentage points worth of the workers’ annual salary at first, and increase gradually over a period of years. It will be actively invested in a tax-free fund of various assets and contributions will carry tax-relief for workers and employers.

Endless pension reports (including from the OECD) has been calling for such a scheme in Ireland for decades where private pension coverage has fallen below 47% of the working population. It needs to be done. But we also need to urgently reform the Irish state pension and the civil/public service schemes to also make them sustainable and fair.  Varadkar should be starting with the pension sectors that come under his and the government’s direct remit.

In Canada, just seven months into office, Morneau fashioned an agreement with the required majority of provincial premiers to start raising CPP monthly contributions. From 2019 for a rolling period of five years, contributions will rise by c$7 a month. By 2025 the annual benefit will rise by a third, from c$12,650 to c$17,478 and a typical worker earning $55,000 (the maximum income on which contributions are paid) will be paying an additional c$34 a month in contributions.

The Canadian Pension Plan is loosely modelled on the UK one and is two pronged to also include the Old Age Security pension. The latter’s benefits (about half the total maximum CPP payment of $12,650 are means-tested and anyone earning over $71,592 from private retirement income is subject to a clawback of OAS benefits.  Like here, many Canadians have private occupational pension membership or have an RRSPs, a personal pension plan.

Unlike here, however, Canadians can draw down their CPP from age 60, though at a lower rate of value than if they waited to age 65 (it will rise to 67 by 20123) or they can postpone drawing down their CPP until after age 65/67 and claim a higher benefit. 

These are the kinds of reforms we need for the Irish state pension, which isn’t adequately funded as it is, and will see a doubling of beneficiaries by 2050.  

But our system needs even more than just an increase in contributions, a clawback of benefits from retirees with substantial private income and a higher retirement payment incentive to encourage people to delay claiming their old age pension.

Faced with a bankrupt scheme by the mid-21st century, in 1997 the Canadians set up the CPP Investment Board to begin investing their workers’ state pension contributions to meet long term pension payments. Though still a hybrid part invested/part pay-as-you-go system, the CPP fund is worth $287 million and is projected to be worth $580 billion by 2030. It is the 10th largest sovereign wealth fund in the world.

We were there once too. It was called Pension Reserve Fund.

 

 

 

 

 

 

 

 

 

 

 

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Money Times - August 18, 2016

Posted by Jill Kerby on August 18 2016 @ 09:00

 

MICRO CREDIT: THE WAY FORWARD FOR CREDIT UNIONS?

 

Credit unions have been roundly criticised for not lending enough over the last several years. Beset by a blizzard of bad debts after 2008, like the banks, many of them were forced to reduce or stop lending altogether by the Central Bank, their regulator.

At least 100 have been merge to achieve some kind of viable  economy of scale, while a small number of completely unviable others have been forced to close (thankfully, without any financially loss to members.) 

A few weeks ago, the best thing to hit the Irish credit unions in recent times -the Personal Micro Credit (PMC) pilot – was rolled out from the 30 CU’s taking part, to the 330 credit unions across the nation.

What began last November in association with the Social Finance Foundation, Citizens Information Board and MABS quickly caught the interest of the targetted members: people in receipt of social welfare payments who might otherwise be borrowing from expensive moneylenders who can charge them of 290% annual interest.  

The ‘It Makes Sense’ loan has been well publicised since it was launched last month, but is worth returning to now, if only because so many parents are trying to find the hundreds of euro per child needed to equip and uniform their school-going children for the new school year.

Instead of borrowing, say, €500 over 6 months from the moneylender and paying back as much as €500 the ‘It Makes Sense’ borrower will pay a maximum of 12% (12.68% APR) interest from their credit union and a total repayment of €515.72. The weekly repayment will be less than €20.

What  makes this scheme so attractive to the credit unions is that the repayments are guaranteed as they are deducted from the borrower’s social welfare payment at source. There is no question of a default, so it is, effectively a risk-free loan.

The pilot’s €700,000 budget was well spent and the new permanent scheme will generate multiple amounts if the estimated 360,000 people who use official moneylenders – a large number of whom would be in receipt of social welfare benefits – take out the new loan instead. The organisers have claimed that moneylending activity in their areas has fallen considerably since the advent of the scheme.

To qualify for an ‘It Makes Sense’ loan you must be over 18 and a member of a credit union though the new loan is available immediately to people who only just join their local CU. (Normally there is a loan waiting period so that you can establish a savings record.)

You can borrow between €100 and €2,000.  Loan terms are between one month and two years but you must be either in receipt of the Household Budget Scheme from which the loan payment will be deducted, or if your social welfare payment is paid into a bank or credit union account, via a standing order or direct debit. Loan approval is within 24 hours of application.  The maximum deduction from your weekly benefits cannot exceed 25% of its value.

You have to wonder why a scheme like this, to break the dependency of so many people on expensive moneylender loans didn’t happen sooner.

But innovation isn’t something that happens very readily after a big financial shock like 2008; instead, as we have seen with the banking sector in general, the hatches are battened down instead and lending tightens as balance sheets are rebuilt.

The success of this micro-lending scheme begs the question, ‘can the Credit Unions find a way to attract mainstream bank customers who are also having trouble raising loans or will have to pay higher interest rates?’

Cracking that nut will depend on how much initial risk the CU is willing to take since working people, outside of the public service, have no income guarantee and therefore no repayment guarantee to offer. 

However, it isn’t beyond the realm of possibility to factor in a post-employment social welfare payment into a micro-loans for this cohort of borrowers. That is, in the event that the member borrower of an ‘It Makes Sense’ loan loses their job or falls ill and ends up in receipt of a social protection payment, that their repayment (however adjusted to their new circumstance) is then paid directly to the credit union.

Meanwhile, the credit union remains that most financially attractive – and ethical – source of smaller personal loans and is streets ahead in the commitment to local communities.

 Where the CU’s lose competitive edge to the banks in not lending mortgages and in not offering the same range of banking services (debit/credit cards, on-line banking) but these are inevitable if the movement is to survive…and prosper. 

A list of all the participating credit unions (more are being recruited every week) is on the League of Credit Union’s webpage www.creditunion.ie and the ‘It Makes Sense’ Facebook page @itmakesenseloan

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

 

 

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Money Times - August 9, 2016

Posted by Jill Kerby on August 09 2016 @ 09:00

 

HOW THE BANKS ARE (STILL) BAD FOR OUR FINANCIAL HEALTH

 

The whole point of the banking system is for people not just to have a “safe” place to leave their money, but to have an affordable, reliable place from which to borrow money.

Once upon a time, about a million years ago, the money ordinary people and companies left on deposit was the source of much of the banks’ lending. Their profit was derived from earning more on the loan interest than they paid out to depositors.

But modern banking has evolved from a simple, profitable business to a very complex, complicated one in which not just the deposits , but the loans too, are leveraged many times over creating a huge waterfall of digital credit and money magicked up on computer keyboards with no basis in the old reality of hard work, productivity, earnings, profits, saving and investment.

All western economies rely entirely on this massive leveraging of artificially derived credit and debt. Phony money distorts prices; it leads businesses to borrow too much for the wrong reasons. It feeds asset bubbles as it artificially pushes up prices and the value of shares, bonds and property. It is also at the heart of the collapse of the western banking sector back in 2008 and why our banks are still amongst the most fragile in Europe.

Our banks, just like Italian, German, French and British banks, are still stuffed with bad loans and collateralized assets that are still worth less than when they were first purchased with magicked up money. 

The recent ECB stress tests showed that our banks will probably need another bailout if there is another serious financial crisis happens.  It won’t take much to tip western economies back into recession: growth remains sluggish pretty much everywhere; unemployment is still to high, people and corporations carry too much debt, their taxes are too high and incomes are too stagnant for people to demand the levels of credit needed to keep the ‘growth’ show on the road.

Fractional-reserve lending has been the scourge of modern banking for most of the past century but it began to spin out of control, along with Western government deficit spending (living beyond their means and accumulating large national debts) 45 years ago this month, when the last vestiges of the gold standard were abandoned by US President Richard Nixon. 

Deficit spending – economic methadone – is what keeps states, companies and individuals functioning. Could you survive without a cheap line of credit?

The latest stress test should come as a reminder to everyone, especially those readers who starting thinking (about two years ago) that the banks were “fixed” and that investing in them again might be a good idea, that they are not fixed. They remain damaged goods.

Brexit simply amplified what was apparent for many months:  the Irish and European banking sector remains weak due to legacy debt that was never cleared after the 2008 crash and that their earnings prospects are not good in moribund economic times.  Irish bank’s shares are worth half what they were this time last year, but even the great Deutsche Bank price is down 50%. The Italian banking sector is effectively bankrupt.

Under new EU banking rules however, bond holders, shareholders AND depositors (who already earn nothing) will all have to pay towards the cost of the next bailout. Honest bankruptcy was never countenanced in 2008 and probably won’t be the next time. There are no votes in the kind of (necessary) disruption that would create .

We can argue all day about the likelihood of another bank crash and its possible causes.  No one can know exactly when it will happen. But not even the great credit creators in the ECB can keep printing money from thin air forever, deny depositors any kind of a returns, or even inflict negative returns and get away with it forever…as the price of shares and bonds held by the super rich continue to soar.

Something will have to give. Or someone.

Until then, heed the time-worn warnings from 2008:  NEVER leave more than €100,000 in cash in ANY Irish credit institution or EU one.  Should there be a bail-in and you have more than that on deposit, you could end losing it.

The Irish Deposit Guarantee Scheme is in place, such as it is. But the fund from which compensation would be paid is, however, worth less than €400 million, a tiny fraction of the value of national deposits.

Meanwhile there is no pan-European deposit scheme to come to the rescue of any single country’s depositors should their DGS fund be unable to honour all its claims.

Remember Cyprus.

 

 

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Money Times - August 2, 2016

Posted by Jill Kerby on August 02 2016 @ 09:00

 

COMMISSION PAYMENTS: THE CENTRAL BANK WANTS YOUR VIEW

A guy goes to a solicitor with two casts on his legs: “I was hit by a bus as I crossed the street on a green light. I need your help. How much will it cost?  “Not a thing,” the lawyer replies. “My advice is free. The bus company will pay me for representing you.”

Another guy goes to his doctor with aches and pains. “I need your help, doc. How much will the treatment cost?”  “Not a penny. These drug companies will pay me every time I prescribe you a drug or treatment.”

Finally, a young person finds a college that waives all fees. “Wow, that’s great,” says the student. “Yes it is,” the admissions officer explains:  “The tobacco industry pays us generously every time we recruit a new student.”

Who in their right mind would ever engage the services of any of the above?  How could anyone expect worthwhile, impartial, independent advice, treatment or instruction in such circumstances?

Yet nearly every person who has bought protection insurance or an investment fund (maybe even a mortgage) in Ireland over the past three decades has probably dealt with a salesman or broker whose livelihood is provided not by you, their client, but by the product provider.

And if the size of that payment is not absolutely transparent, then you have no way to compare its cost to other similar products, or more importantly, to determine what impact the commission will have on the short, medium and long term value of their insurance cover or investment fund.

Let me be absolutely clear. Commission is paid out of the premium contributions you make to the insurer or pension/investment company. The size of the commission will vary by product and by product provider. (The relatively modest commission a motor insurance broker receives is not as eventful as the huge, on-going one some pension holders pay.) Some product providers pay more than others, but there is no central register of commissions so that you can easily compare them.

There is no such thing as “free advice”. The salesman or broker who takes commission may provide you with appropriate, cost effective advice but their payment is coming out of the insurance premiums you pay every month or year, or from the accumulated value in your investment fund.  And when other policy and fund management charges are added to high commissions, there will be a devastating, cumulative effect on the value of investment funds in particular.

Commission payments are not the only reason why financial services products, have a reputation for being complex, opaque, expensive and poor value, especially over the short and medium term.  But over the decades that I have been writing about personal finance, they have contributed to the poor financial outcomes so many people have experienced with investments and the lack of trust so many people have in the private pensions industry in particular.

The Central Bank of Ireland, which regulates the insurance and investment industry has finally decided to address this hugely important and serious problem, decades after calls to do so by yours truly, other financial journalists and one well-known consumer advocate, Eddie Hobbs who in the early 1990s exposed the scam that was the so-called endowment mortgage industry. (This spilled over to the shortcomings of ‘whole-of-life’ insurance, which so many MoneyTimes readers have experienced and continue to, to this day as they discover their increasingly expensive life policies have practically no value.

The Central Bank, in a ‘Discussion Paper’ published last week said it is seeking the “views on the risks and benefits to the consumer of the practice of insurance companies, banks and other financial firms paying commissions to intermediaries who distribute their financial products.
 
It is important that the remuneration structure for staff of both financial services providers and financial intermediaries is designed to encourage responsible business conduct, fair treatment of consumers and to avoid conflicts of interest.”

Commission remuneration is already banned or is being banned in other countries, including the UK. The conflict of interest distorts the client/adviser relationship and the crucial need to provide impartial, independent advice especially in the case of investment products. Even where there are disclosure regulations, too often they are paid lip service by the intermediary and not sufficiently policed by the regulators.

I will be making a submission to the Central Bank against commission payments. The deadline is 18 October 2016.

If you were missold, or had a poor financial outcome or experience in the purchase of an endowment mortgage, insurance policy, a ‘whole of life’/investment policy, a mortgage, an investment fund or pension, from which commission was deducted, you should make a submission too. (See consumerprotectionpolicy@centralbank.ie )

Or you can also contact me at my email address below and I will add your story to the huge archive of complaints that I’ve received – and kept -over the past 25 years.

 

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Money Times - July 26, 2016

Posted by Jill Kerby on July 26 2016 @ 09:00

 

RENTING VS HOME OWNERSHIP …YOU’RE LOOKING AT THE FUTURE

The last time I lived in rental accommodation was in 1986, just before my husband and I bought our first home in Dublin. The only time before that date that I lived in an family-owned home was 1968, and then, for just the previous six years.

Home ownership was not for us, but my family’s story would not be untypical for many generations of Montrealers, at least not up to the early 1990s, before the onset of condo-ization of apartment buildings and new builds.

Metropolitan Montreal (as opposed to its suburbs) still has a very large rental community and remains Canada’s most ‘European-like’ city.  Home ownership, until the first wave of cheap credit that began to sweep the western world in the 1990s, was mainly the preserve of better off professionals, the managerial class and very often, ambitious, extended immigrant families willing to get onto the property ladder quickly, no matter the neighbourhood.

Big families like ours were content to rent.

One of the tempering effects to widespread home ownership in Montreal wasn’t high prices but high property taxes, which remain to this day and were exasperated by grand (and grandiose) building projects that began in the 1960s and peaked with the bankrupting folly of the 1976 Olympics.

But the long tradition of home rental – at one time over 70% of its citizens were tenants, including my grandparents for most of their lives as well as my parents – also ensured that there was a long tradition of varied properties and flexible leases that served Montreal’s large and eclectic mix of working people, immigrants and students. 

Regulation was never as strict as tenant’s advocates wanted nor as liberal as landlords always prefer. But the strong supply of property, owned and managed by a mainly professional landlord class meant that disputes were settled not just by the city’s regulator, but by the market:  a landlord that ignored his tenants’ complaints, allowed a building to deteriorate or raised his rent beyond the market norm, lost business and tenants quickly. Rent control was reserved for city owned, social housing tenants.  

I write all this as a response to the government’s publication last week of the 117 page Action Plan for Housing and Homelessness. The section on the rental sector is far shorter than it should be, but makes a start at identifying complex, key issues: especially the immediate and obvious need for more supply, diversity and variety of rental properties, suit everyone from students and young single workers, to childless higher earners. The report recognises that families are going to be raised in apartments and more older people and pensioners are going to need – and want – to downsize their existing homes, owned or not for rental accommodation that also suits their needs.

As this lengthy report shows, there is plenty of regulation of the rental market, but it isn’t comprehensive enough, nor efficiently enforced. Sorely lacking is a basic, standard requirement for rental certainty, which is not the same as rent control.

Montreal’s tenancy success centred on the flexibility of lease-holds and landlords:  as a student I never signed anything but an annual lease because I lived on an uncertain income. But my parents, responsible for housing (and educating) their five children, my grandfather for many years and assorted pets, signed typical 4-5 year leases. When we were very young, they signed a 10 year lease that was broken in year eight when they bought their one and only house in a distant suburb.

(Home ownership was not a success and we returned to a spacious, modern, city centre apartment overlooking Montreal’s skyline with utility rooms, a rubbish shoot, parking, a heated pool and Metro access, a doorman and a ‘super’ who kept the place spotless and did minor repairs.)

Security of tenure – including remaining a sitting tenant when a property is sold or foreclosed, professional landlords, and a wide selection of affordable properties that genuinely reflect demand and what people can afford, even the poor, is what has always made Montreal such a liveable place.

That the bulk of full-time rental properties are unfurnished is another big difference between what is normal in most other vibrant renting communities and here.  Only having furnished properties to choose from not only increases the cost of renting, but it discourages a sense of a place being your actual home, and not just someone else’s property and who’s mortgage you pay.

Over 20% of the Irish population now rents their home. Home ownership has fallen below 70% here and according to the report, the average income-to-rent ratio, while very high at 40% in Dublin, averages at a reasonable 23% in the rest of the country.

Millions of Europeans (and Canadians) have lived and raised families and retired in rented accommodation. Millions of Irish people will end up doing so too some day.

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

 

 

 

 

 

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Money Times - July 19, 2016

Posted by Jill Kerby on July 19 2016 @ 09:00

 

COLLEGE FEES ARE BEING REVIEWED:  PARENTS NEED A FUNDING PLAN NOW

 

A close friend of mine has three children. One is already in college, one starts in September and the third is 17 and will do her Leaving Cert next year. You can see where this is going…

My friend and her husband will have paid €11,500 just in college registration charges for child number one. Assuming the fee is capped at €3,000 – a very big if – they’ll dole out another €12,000 for child number two and in a year will start paying another €12,000 over four years if child number three also does a full, four years honours degree course. 

Thats’s grand total of €35,500 just in registration charges for their three children over less than an eight year period  – money they were unable to put away into a deposit or investment account for education purposes, “for the simple reason,” said my friend, “that we have only had one full time salary coming in since the kids were little.  My part-time work over the years paid for groceries and petrol.  The child benefit went to pay for everything school-related and if there was anything left over, for sports clubs, dancing and music lessons and later, grinds.”

Like many parents with bright kids who want to go to college, a large chunk of the cost of their third level education is being paid for from their income and from loans.  Their worry is that either they, or their children might have to pay for their future fees – real fees, not just “registration” charges -  will be in the form of bank loans.

The government is just starting to explore this funding issue and seem to be leaning towards some kind of student loan option over raising general taxation or simply charging real ‘market’ fees (as in the United States) and then relying on the universities to subsidise students who cannot afford the fees/loans with bursaries and endowments.

With a decision unlikely too soon  – this government is precarious enough – parents with children approaching college age still have a little breathing space in which to try and put a realistic funding plan of their own in place if UK style college fees are introduced here.

KBC Bank recently produced the results of a personal borrowing survey. It found that 9% of the adults questioned said they were borrowing for education purposes. Another 10% were borrowing for “refinancing” reasons. 

I’ve spoken to many parents over the years – especially pre-2008 - who used refinancing loans to clear or reduce high cost credit card, store card or hire purchase loans in order to then be able to borrow to pay for third level costs. Some even did so in order to act as guarantor for post-graduate loans taken out by their older children. Most were refinancing at very low mortgage borrowing rates, which are, unfortunately, no longer available.

And while refinancing at lower repayment rates is a very good idea, the KBC survey threw up one very alarming result:  53% of those surveyed, who currently have a personal loan, have no idea what interest they are paying though 73% of respondents sensibly opted for fixed repayments and just 27% for variable ones.

Understanding the impact of compound interest is a key step in being a successful, sustainable borrower. For example, the difference between paying 7.49% (KBC Bank, Ulster Bank, Bank of Ireland) and 12.5.% (Permanent TSB) for a €10,000 personal loan over a five year period, an overlap period my friends face, is the difference between paying €3,297 interest and €1,940. This is highly significant if you have this kind of potential borrowing requirement over a number of different three or five year periods as one child graduates and another enters third level.

KBC Bank has become one of the most competitive lenders, especially to current account customers, but parents/young people should also be looking into credit union rates that are calculated on diminishing balances rather than via compounding repayments which can make for a very competitive total repayment cost.

The ideal way to meet the cost of higher education, is to save and invest from their early age. Scholarships, bursaries and grants are very helpful too, but if they aren’t available you need a plan of your own:

 

-       Aim, where possible to pay at least half of the ongoing annual costs from savings and earnings. This might involve some serious budgeting measures and encouraging your children to get summer/part-time jobs.

-       Shop around for the best borrowing rates, usually offered for amounts of €10,000 and more. Always check comparison sites like www.bonkers.ie and www.consumerhelp.ie

-       Check your credit score at www.icb.ie, the Irish Credit Bureau. Your chances of getting any loan is poor if you’ve an impaired credit record.

 

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

 

 

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Money Times - July 12, 2016

Posted by Jill Kerby on July 12 2016 @ 09:00

MORE letters…as the Brexit fall-out continues

 

BMcC writes:  I read your answer last week about the converting a euro inheritance to Sterling. I have a pension lump sum that could clear a mortgage that I took out 10 years ago when I lived in Glasgow. The apartment is rented and I was thinking of keeping it. But now that the euro is worth 10% more and there’s so much uncertainty about what will happen in Scotland, I’m wondering if I should clear the loan.

 

Right now you know that clearing this mortgage early – especially if you can do so without a penalty – will result in a 10% cash bonus due to fall in the sterling/euro exchange rate. However, the rent will now buy you 10% less if you are redeeming it home. Ditto for any capital gain from a sale. You need to weigh up the uncertainty of the Brexit fall-out with the certainty of an immediate exchange rate savings if you pay off the mortgage tomorrow. This is the only event you can control. Whether Scotland separates from the UK and joins the EU is anyone’s guess. 

 

MC writes: My defined benefit pension scheme was wound up in 2011. I was 66 in February and was advised to take a tax free lump sum instead of buying a pension.  I received a cheque worth just over €57,000 but I don’t really know what to do with this money to get the best return. I want access to some of this money, but want the rest as a pension top up.

 

If the €57,000 is your entire pension-related payment from your job, then I will assume that the pension to which you refer, is your state pension, worth €12,220 a year. What is less clear is by how much you want to top up your pension income of €235 a week. Do you need an extra €50 a week? €100? (ie €2,600 to €5,200 after tax, charges)  This represents a net (after tax and charges) annual return from €57,000 of c4.6% or 9.2% respectively.

 

Returns like this require considerable risk to the capital, which you don’t appear to be able to afford. As I have written a number of times before, deposit returns are so low these days, with even the best longer term fixed accounts only paying c2% per annum (or €1,140 on a €57,000 balance) you may have to draw down your capital sooner than you expect. To avoid depleting it entirely, you should start thinking of ways to earn more, whether from direct employment or self-employment. If you own your home, the tax-free Rent-a-Room scheme should be investigated or even down-sizing.

 

 

 

MF writes:  I would like to know what happens to my husband’s occupational pension if he predeceases me?

 

You might be entitled to either a lump sum payment or a pension for life if your husband dies while in service. If he is already getting his pension and predeceases you, then you may be entitled to a widow’s pension.  This is usually half the value of his pension, but it will depend on the rules of his pension scheme and whether or not he opted for such a benefit to be paid to you when he retired. You and your husband need to check the retirement beneficiary options available at retirement and/or speak to a pension scheme trustee if you do not have this information to hand.

DL writes: In 2004 we bought a leaseback apartment in France. The rental income was fine until the 2008 crash. Even though my husband lost his job (he’s back working now) we managed to scrape together the repayments to the French bank until two years ago when we asked them for a payment break. We ended up missing three payments and they handed our loan to a debt collection agency that is now demanding the outstanding €50,000. My husband wants to raise an Irish loan – that’s if we get one - because he thinks the property will be worth more in a few years. I think we should sell -  our children start college in two years and we need to pay this expense. 

 

You don’t say how much the apartment is worth, or your own home in Ireland, but unless you have a huge amount of equity in these properties, your chance of getting a €50,000 loan from an Irish bank to clear your French arrears are probably quite slim. Unless you can find the money you owe from somewhere else, you may have no choice but to sell the French apartment. You can then start working on repairing your impaired credit record.

 

Finally, leaseback holiday properties often included VAT subsidies that could be clawed back if you sold the property before the repayment contract ended. You might have to pay the French government such a refund. Any capital gain will be subject to 33% tax in Ireland, less your annual CGT allowances of €1,270 and sales costs.

 

 

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