Make sorting out your savings, pensions and credit cards one of your resolutions – Fiona Reddan
If you’re suffering a case of the January blues – and your cupboards, wallet and bank account are all bare – it may be an opportune moment to take stock of your financial health.
Yes, it’s easy to moan about water charges, stock markets and property prices, but while there are many factors over which you have no control, there are plenty of financial decisions to improve your financial health that are within your control. It’s up to you.
So to get the new year off to the right start, over the coming weeks we’re going to look in detail at how you can give your finances an “NCT”. Whether you’re saving for a house, looking to slash your debt, preparing for your retirement or wishing to protect you and your family, we’ll give you a run-down on how to improve.
To get you started, we present a quick overview to help you get 2015 off to the right start – and to help replenish your bank account.
When it comes to shopping around for gas or electricity, most of us will always find something better to do. However, it’s foolish to do so. Thanks to websites such as bonkers.ie, it has become very easy to compare what’s on offer. All you have to do then is pick up the phone and switch.
Take electricity prices for example. If you’re a typical user of electricity, you could save about €140 a year by switching from Bord Gáis’s residential plan to SSE’s direct debit plan.
If you took a similar approach with your gas bill, you could be in line for similar savings by switching from Bord Gáis’s standard account to Flogas’ Optimiser direct debit discount account.
Maximise tax relief
There may be far fewer ways of reducing your tax bill these days, but that doesn’t mean that you shouldn’t take advantage of the ones that remain. Every year a survey is published which reveals the extent of unclaimed tax reliefs, so if you don’t want to be one of those people, a little bit of effort can reap a decent return.
Tax specialists, like taxback.com for example, will claim tax back for you at a cost of 10 per cent of the refund received, subject to a minimum fee of €40. It says the average tax refund is €880 and allows you to work out how much you might be owed before you commit to its service. For self-employed clients who need to file a tax return, the charge for this service is a flat, upfront fee starting at €199.
Alternatively you can easily take charge yourself – check out revenue.ie for the appropriate forms and how to file them. Remember you can go back four years with your expenses, which means you can claim as far back as 2010.
One of the most useful reliefs is for unreimbursed medical expenses. You can claim 20 per cent on a host of medical expenses – once the deduction is made for any money you may have received from your health insurer.
Remember also that if eligible for the Home Renovation Incentive scheme, you will start to feel the benefit of this 13.5 per cent tax credit in your payslip from this month. Latest figures from the Revenue show that €279 million in eligible works were recorded on the system as of December 16th, involving almost 14,000 households.
To qualify for the scheme, you need to spend at least €5,000 (including VAT at 13.5 per cent), but this money can be made up of a number of payments to different qualifying contractors. The maximum amount you can claim relief on is €30,000.
Remember, if you’re a landlord this scheme also applies to renovations carried out on rented properties from October 1st, 2014. You can claim your tax credit in mid-January, and it will be applied evenly between the 2015 and 2016 tax years.
If you find it difficult to put aside some money at the end of each month, you might be taking the wrong approach. Financial advisers will often recommend that you “pay yourself first”, rather than waiting to see what you have left over at the end of each month. In practice, this means that you set up a direct debit which takes money out of your account as you get paid – rather than waiting until the end of the month, when you’ve paid everyone else – Sky, ESB, Vodafone etc – and have little left in the kitty to save.
If you’re already a keen saver, try and increase the amount you save – it all adds up, even if you may not earn a decent return, given how low interest rates are. If you’re saving for a house, developing a decent savings habit will impress the bank while it might also be an essential given the Central Bank’s move to increase the deposit buyers need.
If you put aside €100 a month in Nationwide UK’s regular savings account which offers a return of 4 per cent, for example, this time next year you’ll have built up a little nest-egg of €1,200 – and earned (an albeit underwhelming) interest of €26 on top. Beef that up to €200 a month and you’ll have €2,400 in a year, and have earned €52 gross in interest.
And if you’re wondering just how you might get that extra money to save each month, the next two steps might just release the cash you’ll need.
If you have a lingering credit card debt, make 2015 the year you finally tackle it. Remember, if you pay off a credit card debt with an interest rate of 20 per cent, you get a 20 per cent return on your money.
The first thing would be to seek out a credit card which offers a 0 per cent introductory interest rate on balance transfers. While most providers used to do this, the practice is now limited to KBC Bank, Tesco and Permanent TSB – and they don’t necessarily have to accept your balance. If they do, however, take advantage of the offer to try and pay down your debt as much as you can in the six months the offer runs for.
Another approach which can help relieve the debt burden is to repay more than the minimum payment each month. Let’s say you have a debt of €2,500 on an interest rate of 18 per cent and repay just €75 each month. It will take you three years and 11 months to repay this debt at this rate. Double your repayments to €150, take the hit each month and watch that debt get cleared within 20 months. And, going forward, try not to use your credit card. Keep it in your wallet for emergencies and use a Visa debit card instead to pay for concert tickets – that way you’re only spending what you can afford at the time. If you do use your credit card, repay as much of the balance as you can each day to keep those hefty interest charges at bay.
Protect my family
If you’ve recently experienced a major life change – a new baby, marriage, house purchase, divorce – or if it’s just something you’ve never got around to, it may be timely to review just how well your family is protected in the event of death or a loss of income.
Not everyone needs life insurance, but remember, stay at home parents or those out of work at present may still need life cover. Minding children and taking care of your home all have a cost associated if you should find yourself no longer in a position to do it.
When assessing your needs, your first port of call should be your employer. Are you a member of a death in service plan or can you join one? This can significantly bump up your life cover, with many employers offering four times your salary to your spouse in the event of your untimely death.
If you own a property, it’s likely that you’ll already have mortgage protection in place, but if it’s an investment property this may not be the case.
Even with the above, you may find that there is a shortfall between the amount of money your family would need to survive and what would be necessary to cover all debts in the event of your death. This means that you will need to get additional cover.
Thanks to the gender equalisation directive, men and women now pay the same for life cover.
Irish Life for example would offer a 34-year-old non-smoker life insurance of €100,000 for just €15 a month for a term of 20 years.
If you’re a smoker, the premium jumps to €18.69 a month, while if you’re older, you will also pay more. A 41-year-old non-smoker for example would pay €18 a month for the same cover.
Review my pension
If retirement is still some years away, it’s likely that you have never taken the time to sit down and review not just how your pension is performing, but whether or not you’re contributing enough.
In the brave new world of defined contribution schemes, the onus is on individuals to provide for their retirement. Yes, your employer might be matching your contribution, but this may not be enough to keep you in the style to which you’d like to become accustomed to in your golden years – or even to pay your bills.
If you fear you’re not contributing enough, remember that it’s never too late to take action.
A good way of assessing just how far your contributions are going is to have a look at mindthepensiongap.ie, a service offered by Aviva. It tries to ascertain just how much of a shortfall you might have in your retirement years.
Consider the example of a 30-year-old man on a salary of €36,000 who expects to retire at the age of 68 on an income of 65 per cent of his current salary. Even though he’s putting 6 per cent of his salary into his pension fund and his employer is matching this, he’s left with a “pension gap” of €3,888 a year.
This is despite the inclusion of the state pension of €11,976 a year, which may well be diminished by the time he gets to retirement, a factor which would stretch his gap even wider.
The solution lies in his contributing 13 per cent of salary to close this gap. While doing so may be beyond the reach of many, the message remains that many of us are not contributing enough to our private pensions. If he upped his contribution to €270 a month (net cost is about €162 thanks to tax relief) his pension gap will fall by about €1,500 a year.
Bear in mind that the problem of a “pension gap” can be even greater for women, given that many will take some time out of the workforce to rear a family.