Is Mortgage Protection and Life Insurance the same thing?

You’ve probably heard the ads on the radio asking you whether you have life insurance or mortgage protection. What are they talking about and should you bother checking?

Well, allow me to explain.

Mortgage protection is simply a name given to type of life insurance that decreases over time alongside your mortgage as you pay it down. It starts at say €300k (if that’s what your mortgage amount is) and reduces to zero over the same period of time that your mortgage is due to run for. If there is two of you on the mortgage then your mortgage protection will have to include the two borrowers but the life insurance will only pay out on one of you dying, whichever one of you dies first. Fun stuff I know! The cost will remain fixed for the full term of the mortgage too even though the cover is reducing.

Being honest it’s not the best value type of life insurance available to you, but it conveniently does work well beside your mortgage. However, it can cost just a little bit more to have a far superior policy that doesn’t decrease and pays out in the event of both of you passing away which means that you are insured for double the amount with the benefit remaining the same throughout the term.

I looked at the cost for client last week and their bank had quoted them €62 for a joint life mortgage protection policy. Whereas a dual life (double the cover) policy which stayed level throughout the full term was only €71. Spending the extra €9 got these clients a far better policy.

Life Insurance which isn’t designed to be mortgage related tends to be better value in my humble opinion. This type of life insurance is not linked to your mortgage, so it is designed to provide financial security to your family in the event of you passing away.

Now this is the interesting bit if you do pay life insurance. This is the industry knowledge bit that allows you to get one up on the lender that sold you your existing life insurance policies.
1. Banks are tied agents, so they can only advise you on one provider of life insurance. That provider tends to not offer discounts to its bank customers as they have a captive audience.
2. There are several providers of life insurance in Ireland and the ones that aren’t partnered with the banks will do deals to get your business. This means that the same thing you pay for today could be 15% – 20% cheaper elsewhere. Well worth a look.
3. Set up is crucial. If you have an old mortgage protection policies it is fairly likely that it could be replaced with a far more beneficial policy for a very similar premium by using some of the discounts that are available, but the setup is crucial. Get this bit right!

When we set up New Beginning Financial Services one of the most important things we did was that we retained our independence. We are not tied to any one provider and as such we take advantage of the discounts that aren’t available elsewhere. We get paid from whichever provider we use, which means we don’t have to charge you fees directly so no charge.

We have been very busy recently changing client’s life insurance set up and in every single case we have improved a client’s finances.

As always, we would be delighted to help you too so please just send me a quick email on nick.lawlor@newbeginning.ie or call Kathy on 015310571 and I’ll call you back.

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Payments Under Personal Insolvency

Some people express concern about entering an Insolvency Arrangement which will last for 6 years. During that period, the debtor will be subject to annual review, meaning that if household income increases there may be increased payments required towards the arrangement.

In those circumstances, the debtor feels that he is still under supervision and not free to start again.

While it is true that where a PIA or DSA provides for payments over 5 or 6 years there are annual reviews, the arrangement can define what will happen in the review.

For example, it could provide that the first increase does not alter the payments and thereafter, where income increases beyond an amount, an agreed portion of that increase will be used towards increased payments. We have seen cases where it has been agreed that an increase of up to €500 per month will not change the terms of the agreement and thereafter 50% of any increase will be used towards increased payments.

These types of arrangements give the debtor an incentive to increase income while at the same time being fair to creditors who have taken a large debt write down.

It is also the case that many people’s income is unlikely to change dramatically. In cases where people are in employment it is relatively easy to determine income into the future. In those circumstances, the debtor really sees the payments as an affordable loan payment which will end in a defined period of time.

All this being said, it is always better, where possible, to agree a lump sum amount so that the arrangement comes to an end quickly and the debtor is free to move on unhindered by past debts. The lump sum could be sourced from family or friends and could be repaid over time.

Where lump sum deals are involved it is generally expected that the monies are paid within 6 months of the arrangement coming into force. But once the payment is made the remaining debt is written off in full.

When determining the amount of the payments or the lump sum regard is had to the Insolvency Service’s guidelines on Reasonable Expenditure needs. Information on these amounts can be found on the ISI website.

The amount is dependent on the composition of the family but taking a family of 2 adults and 3 children the system would say that the minimum reasonable expenditure needs of the home are €2700 plus mortgage or rent costs. This would increase where extra costs are involved such as child care or medical expenses. Assuming mortgage costs for this family to be €1500 the after-tax income would need to be €4200 before any other debt is paid. Any amount over and above this would constitute the basis for calculation of payments.

Where anybody is in mortgage arrears of where debt presents a difficulty, they should meet with an expert and learn about the options that are available.

3 Money Saving Tips and Tricks

As we enter the summer months, the evenings are long and holidays are close at hand it is often hard to pay any attention to your finances. And rightly so, I am a big believer in taking time to recharge if at all possible.

So, with one eye on summer holidays I decided to highlight just 3 simple money saving tips that all of us can utilise that we often overlook.

1. Tax

So, for anyone who pays tax there are some tax savings tips which we can use to reduce or save tax. We can also claim tax back for the last 4 years, so if any off the below relates to you then you can claim back to 2013 and get a refund from the revenue for all the years since.

a. Did you get married? – If you did get married then you can mix and match your tax credits and high rate tax cut off points, so if either you or your spouse is earning less than €32,800 and the other is earning more than €32,800 then you can adjust your credits and/or bands and reduce your tax bill.
b. Medical and Dental Expenses can still be used to reduce your tax bill. You get 20% of the value of your expenses refunded to you if you submit a medical expense’s return to the revenue.
c. EIIS Investments – These are investments that qualify for 40% tax relief over 4 years. Rental Income and ARF Income can used here too making this type of investment very attractive for anyone with rental/pension income. Tax relief is claimed at 30% in year 1 and 10% in year 4. So, an investment of €20k for example only costs an investor €12k once the tax relief is factored in.

2. Insurances Costs

The costs associated with your mortgage protection and your life insurance policies should be reviewed, and we are happy to help in this regard as we have access to all the providers costing in Ireland.

The insider knowledge here is that these providers want more business. To attract more business, they try to either improve their product or reduce their price. For example, Zurich, Royal London and Aviva are offering discounts on their protection products and these discounts are deducted from the cheapest premium available on the market.

If you took out your mortgage protection, life insurance or serious Illness cover with your bank its very likely we could save you money every month going forward.

3. Pensions

Pensions, yes you have heard me bang this drum before, but they do make a whole lot of sense and they do save you a whole of money!

Pensions still allow for generous tax relief at your highest rate of tax so either 20% or 40%. Over a career not only will a pension save you a small fortune in tax that you otherwise would have had to paid to the revenue but it saves it for a time when you will need it most, when you stop earning an income!

Pension can be paid monthly or indeed can be paid as a lump sum and against last year’s tax bill so there are no excuses, pensions just make sense.

If you need help with any of the above please feel free to get in touch. As always, we will be happy to help if we can.

You’ll get me on nick.lawlor@newbeginning.ie or call Kathy on 01 531 0571.

Chat soon,
Nick

Opportunities to Refinance

New Beginning Funding’s ongoing market analysis shows the high demand for commercial property, SME and development funding as the trend of overseas funds seeking liquidation or refinancing of distressed portfolios is continuing.

We are also seeing a marked increase in the number of commercial borrowers seeking funding for regular commercial property acquisition. Available funding is still targeting transactions in excess of €1m in main urban centres, and options for smaller, non-central, transactions remain scarce.

Funding for SME’s remains difficult to source but New Beginning Funding is in contact with pillar Banks and there does seem to be a growing appetite to fund into the SME sector, including operating businesses.

New Beginning are happy to discuss your requirements and suggest funding options and best ways to approach potential funders.

At New Beginning Funding we have developed strong relationships with a number of key lenders across the market and our funding facilitation services offers commercial borrowers a bespoke service which sources the best funding options, with transactions individually structured to offer most value to prospective borrowers.

We can source funding commitments, based on the specific needs of the borrower, in a matter of days. This means that clients avoid being forced to sell their properties, and with the assistance of New Beginning Funding, can access individual loan structures which are sustainable over the longer term.

New Beginning Funding is looking to assist individuals with borrowing requirements of over €1m in sourcing a range of funding options, including refinancing, to enable settlement of stressed exposures. We are also happy to discuss borrowing requirements with SME’s and can source a broad range of funding options, including, term loans, bridging and mezzanine facilities, development financing and larger commercial facilities.

You can email me at john.ryan@newbeginning.ie or call me on 01-5240000 to discuss options that might be of help to you.

Cohabiting, unmarried and paying life insurance?

Ireland, being the country that it is, has many tax rules and laws that we primarily mightn’t like but secondly, are totally unaware of. And I have been dealing with one such problem quite recently relating to how the revenue views the proceeds of a life insurance policy to a couple who are co-habiting but are unmarried.

In the census of 2015 we discovered there are over 140,000 co-habiting couple living in Ireland. Of those approx. 60% have children. The likelihood is that although these people are not married, they will have or will want to have financial protections in place such as life cover and mortgage protection, to ensure financial security for their family in the event of their untimely death. Makes absolute sense but the problem is, how will the revenue view such a pay-out if the worst does come to pass?

Most will believe they are leaving their partner and kids in a secure financial position but the reality can be very different. If you are in this situation you could be leaving your family with a significant inheritance tax bill without knowing it.

Allow me to explain. A co-habiting couple have a joint life insurance policy for €300k paid from one partner’s bank account. That partner dies so there is a €300k pay-out to the remaining partner as the remaining policy owner. As the couple were not married, the inheritance tax threshold is only €16,250 meaning the balance of €283,750 would be liable to tax at 33%. An unwelcome tax bill of €93,637 lands on the remaining partner’s doorstep, often with no means to pay it.

If the premiums were paid from a joint account they would still be liable for inheritance tax on half the proceeds of the life policy. Furthermore if the policy was set up on a single life basis and there is no will in place the proceeds would actually be paid to the next of kin and not to the remaining partner at all!

For married couples, however, any inheritance is deemed to be tax free so the issue only exist for cohabiting unmarried couple’s.

This unwanted tax bill is however entirely avoidable.

There is a method of setting up your life insurance in such a way that no tax liability is payable regardless of whether you are married or not. Each person simply takes out life insurance on the other i.e. on a “life of another” basis and pays the premium from their own bank account and income, the benefit would be paid out to the remaining partner of the policy without any inheritance tax owing saving most clients in this situation an absolute fortune.

If you are a co-habiting, unmarried couple it is really important to get in touch and have it reviewed as a simple change in the way your policy is set up could make all the difference to your partner and kids if the event you are trying to protect against actually does happen.

As always if you fall into this category please don’t just leave sleeping dogs lie, please get in touch and I’ll be happy to review your set up.

You’ll get me on nick.lawlor@newbeginning.ie or give us a call on 01 531 0571.

Good News on Personal Insolvency

This month saw several very positive developments in Personal Insolvency.

The High Court dealt with an appeal by a couple where KBC had rejected their proposal for a Personal Insolvency Arrangement. The couple owed €285,000 to KBC on their home mortgage and their home was worth €105,000. The proposal was that the debt would be written down to €120,000 and then extended over a longer period making the loan sustainable. KBC objected but offered a split mortgage where €135,000 would be shelved for 23 years on 0% interest.

Judge Baker in the High Court rejected KBC’s position and ordered the write down.

What is interesting about this case is that the High Court directed a substantial write down on the mortgage debt even though the bank had offered a split. The Court was concerned to bring certainty to the couple’s position and the continued existence of a debt – even shelved – did not achieve this.

This is one of a growing number of cases where the new laws give a Court power to enforce a Personal Insolvency Arrangement once the deal is found to be fair and equitable. The bottom line is that the family have a long term sustainable mortgage and all their other debts have been dealt with also.

The Insolvency Services have also recently released figures on debt resolutions.

Applications for Personal Insolvency Arrangements are up 128%. In over 90% of cases the home is saved. 30% of all cases involve mortgage debt write off with average write offs of mortgage debt now exceeding €90,000.

It is very clear to us that the law is now very much on the side of the struggling home owner. The key for a borrower in arrears is to make what payments you can and to seek advice from a Personal Insolvency Practitioner.

And the good news is that the advice will not cost anything.

Call us today on 01-5240000 for more information.

How Should I Take My Retirement Lump Sum?

“If I was a financial adviser I would… know what lump sum is right for me!”

By now you should know your ARF from your AMRF and your trivial pensions to your annuities.

Those choices tend to be the ones that need careful consideration as those decisions are the ones that will affect your entire retirement for years to come.

But what about the cash bit? How much cash can a pension scheme member take from their pension as a lump sum? It’s at this point that most retiree’s eyes light up. This is the part where we explain that all those years of work mean that your now have a windfall of cash on the way.

But you might have guessed it, there are rules.

In general, you can always take 25% of your pension fund tax free. That’s the starting point.

If you are a member of occupational pension scheme in addition to the 25% rule you will be presented with the option to take up to 1.5 times your final salary as a lump sum. Assuming you have more than 20 years qualifying service that is. If you have less than 20 years, there is a sliding scale which reduces the limit from 1.5 times downward. Often this method allows for a client to take more out tax free than the 25% method, but yes of course there is a catch.

I will assume for second you have read my blog on Annuities. If you did you’ll notice that I am not a massive fan of them in normal circumstances. Well, if you take the 1.5 times final salary method then you must use the balance of your fund to buy an annuity. No, you can’t have an AMRF or ARF or anything else, just the annuity.

Now you can shop around for an annuity with good rates and one that you like but the reality is that you are looking at a fast food menu when you really want a steak and you can’t get in to a steakhouse.

It’s a decision between more money now and the balance of your savings on the drip or less more now and full control of your drawdown.

I don’t have a favourite. The individual circumstances of the client dictate which is best for that client, so our first port of call is to understand the clients goals in retirement, their outstanding debt at retirement, their long held desires to buy something or go somewhere special. All of these are important, so think carefully when deciding and please understand your options fully before deciding.

Finally, it important to say that tax free lump sums are only tax free to a point. The first €200k is tax free, and that is a lifetime limit too. If you are lucky enough to have a fund of €800k or more then it’s likely you will have a tax bill on your lump sum too. But don’t panic it won’t be big! Your lump sum between €200k – €500k will be taxed at 20% and the balance above €500k then higher. Speak to us if this is the case as there are various other considerations at this level.

In summary, most of us like cash. Why wouldn’t you, but consider all of these options and draw a map of how you see your retirement going. When will you need most of your money? Is your mortgage fully paid? Do you want to go on the holiday of a lifetime now, later or not at all? Are you going to gift house deposits to your kids?

Your idea of retirement should be the driving force behind how your pension benefits should be drawn down. Map your drawdown to your expected costs in retirement is the key message.

Be warned though, all of the above is just an outline of the various elements of the rules and there are many more which I haven’t covered so please don’t consider this as a comprehensive lump sum guide as it is not.

If you need us we would of course be happy to help, just get in touch with me directly on nick.lawlor@newbeginning.ie or call Kathy on 01 531 0571 and she will arrange a chat for us.

What is an ARF?

If I was a financial adviser I would… know what an ARF is!

An ARF of all bloody names!

In an industry where jargon is one of the biggest customer complaints reported, one of the main options you have at retirement is to move your life savings to a structure whose name means nothing at all to most normal people outside of the pensions industry, an ARF.

Ok, well allow me attempt to demystify one piece of the pensions world for you as best I can.

An ARF is short for an Approved Retirement Fund. These post retirement account, for want of a better term, were introduced in Ireland in April 2000. Before this date your choices at retirement were limited to taking a tax free lump sum first and foremost and then use the balance to buy an annuity which, as I described in my last blog, were an incredibly limited way to spend your life savings.

An ARF crucially allows you retain control of your retirement savings. Once you have taken your lump sum, and assuming you met certain criteria, you can then transfer the balance of your money to an ARF. You can spend it how you like, invest it how like and place with whichever provider you like.

Pensions rules insist that you draw down (or at least the revenue will tax you as if you did) at least 4% per year between the ages of 61 and 71 and 5% thereafter, and these withdrawals are subject to income tax and levies as any other income would be. If you are lucky enough to have a pot bigger than €2million that withdrawal requirement increases to 6% per year.

Crucially you can invest in thousands of different things, so if you have a decent retirement income it’s possible to maintain the value of your ARF by simply earning a return of 4/5% per annum on your ARF. In this case, instead of your retirement savings being exhausted over time you could preserve it to form part of your estate. This is a crucial difference to how an annuity would work, as an annuity would never pass on to the next generation in any circumstance.

This point can be reserved too of course. If you draw down 20% per year your ARF can run out very quickly indeed and you could be faced with having no back up money left should you need your ARF in the years following your retirement to survive, so buyer beware too. It’s not all rosy, so your situation does need to be examined on an individual basis.

The tax treatment of an ARF as part of inheritance is a whole different kettle of fish and far too complicated to get into here so just pop me a quick mail if you want to know the detail around this. Also the criteria around how to allow you access to an ARF are reasonably straightforward and I will outline these next week in my next blog to give you some clarity around these decisions at retirement too.

In summary, I like ARF’s. I prefer clients of mine, assuming they agree with me on certain key principals, to consider ARF’s strongly. The control point for me is a big one. The ability to retain the asset you have built up over a very long time is a huge consideration and the ability to pass this asset on to your kids is significant. There are naturally numerous factors to consider and far too many to cover here, but often the ARF comes out on top once we look at all the options with our clients.

An ARF, of course, won’t suit everyone either, so please get in touch if you are approaching retirement. The decisions made around retirement are lasting ones so each option needs to be considered carefully and each client’s attitudes need to be examined first and foremost before we make a retirement recommendation.

As always, we are happy to help and even if you have any specifics questions about the above feel free to send me a quick email and I’ll be happy to help if can!

Chat soon,

Nick
Nick.lawlor@newbeginning.ie

Investment Funds are Key to our Future as a Society

Last week Ireland sold an inflation linked bond worth €609 million euro. The buyers of this bond will get a return of 0.25% for 23 years. As inflation goes up or down the return will follow.

Think about this for a second.

International investors are willing to give Ireland huge sums of money at tiny returns. The funds are secured by nothing more than Ireland’s word – we will pay the coupon and we will return the funds in 23 years’ time.

Now look at our need for infrastructure – housing, hospitals and water systems to name but a few. Each of these is mission critical – in that we absolutely need the infrastructure. The welfare of our society is dependent on it.

Ireland is constrained in what it can borrow due to proper (in my view) rules preventing governments from borrowing recklessly. Governments do borrow recklessly by the way!

But pension funds and other investors can place money into mission critical infrastructure and where the State is involved, even tangentially, the rates will be low. Semi state bodies or local authorities are the State acting at arm’s length.

Imagine an arm of the State (not the State itself) were to borrow money on the markets to put into real infrastructure – social housing for example.

Housing, built properly, will last for 100 years, and more. At current rates the average house (€250,000) at 3.5% would cost the State €730 per month. Taking a family living on social welfare only, the household income will be conservatively €2000 per month. It is generally expected that the family will pay 10% of their household income on rent meaning the overall cost to the State in providing a €250,000 home to that most vulnerable family could be as low as €122 per week.

This situation for the State becomes even more improved by the fact that over decades the property will increase in value so that the State body becomes asset rich meaning more funds to provide more housing. All the while pension funds receive a return on their investment – and if those pension funds are Irish, the benefits are directed into the economy.

The biggest problem we face is ideological, which generally comes from people not willing or able to think beyond a cliché.

As with the water debacle there is a populist view that taxation can pay for everything – even though we know from bitter experience that this is false. Extra taxes cause a drag on the economy and when downturns come – as they do – the money dries up and there is no investment.

But pension funds, endowment funds, insurance funds, and the rest, are looking for homes. Ireland has, if nothing else during the crash, proved that we will pay our debts and so we can borrow at low rates.

These funds provide a huge opportunity to create the infrastructure we need – delivered today and paid over long periods of time.

The so-called vulture funds which, ironically, are financing most of the developments in Dublin today, are monies from ordinary people in far flung parts of the world. We could and should be doing this ourselves.

The harsh reality is that if we continue to be burdened with 19th century thinking we are going to get 19th century infrastructure.

Our thinking needs to change.

Do You Know What an Annuity is?

Annuities are often undesirable beings that live in the corner of the retirement room.

They were once the alpha male, strutting around, dominating the retirement landscape and providing strong and consistent returns for its investors for life. They often provided a return of 8% – 10% per annum so were attractive options for clients.

This was before the landscape changed back in 1999 and you were no longer obliged to buy an annuity with your retirement savings. Combine that with a reduction in annuity rates since then, has meant that an annuity is no longer a popular choice for clients.

An annuity is a regular income paid for life. You buy it with your retirement savings and it will pay you (and your spouse in some cases) an income for the rest of your days. A rate of say 4% would return a client €4k for every €100k spent. The real problem with annuities is that the €100k is gone. No money back if a client dies after 5 years when only say €20k has been returned. A very poor return I think most will agree! The flip side of this is that should a client live until they are 120 years old the annuity will still be paying them an income and in this instance, it becomes a smart choice.

Some retirement contracts have guaranteed annuity rates built into them and if this is the case then you should sit up and take notice. These rates are typically far better than are available today.

Furthermore, annuities do sometimes serve a good purpose. There is a rule in Ireland that says that once you have taken your lump sum you must have a guaranteed income for life of at least €12,700 or you must invest €63,500 into an Approved Minimum Retirement Fund (AMRF). I’ll go into more details on AMRF another day.

Considering the state old age pension is now €12,391 per annum, you can purchase an annuity for €309 per annum costing about €7725 of your retirement savings. This will mean that you have satisfied the above requirement and can have access to the balance of your retirement savings if you wish.

Also in bankruptcy, there is an allowable regular income for life. If a client invests into an annuity with their retirement fund it can often mean a client gets some value for their retirement savings. Whereas if it was left in another form, the same savings could be lost to creditors.

Annuities come in various shapes and sizes too. For example, there are some single life annuities which will only pay while one policy owner lives, compared to a joint life annuity which will continue to pay some or all the benefit to the first policy owners spouse.

Annuities can increase their payment to the policyholder over time too or they can stay level throughout the term. Annuities can have guaranteed period which mean that even if the client dies in that period the annuity will continue to pay out until the end of the guaranteed period.

There is even now something called and enhanced annuity. This is an annuity which will give you a better rate if you have listed medical condition or if you’re a smoker. I guess they feel the chances of you being around for a long time are less so they will pay you out more every year!

Of course, different providers have different rates so always worth shopping around too.

All shapes and sizes as I said. And yes, lots of jargon too but it wouldn’t be the pensions industry if there wasn’t a bit of jargon.

As always if you have niggling doubts in your head or need more information on any of this please just get in touch with me directly on nick.lawlor@newbeginning.ie or call me on 01 531 0571.

Chat soon,
Nick