Monday, March 23, 2009

Has the Recession changed the 'General Principles' of Financial Planning?

We are living in very different times at present. The whole Financial Services Industry is in turmoil. Many investment companies are hemorrhaging money, as investors call on their savings to meet current financial commitments. Early Exit Penalties, Market Value Adjustments and Loss of Capital don't seem to matter to consumers. They want their money back, and they need it now. Some of those that have direct debits for savings, income protection, pension, and in some cases life insurance, are cancelling what they deem 'unnecessary' in the current climate.

I think that some of the 'Rules of Thumb' that apply to Financial Planning may have to be tweaked, so that our personal finances can be more 'sustainable' in the future.

DEBT

Long-Term

It is inevitable that we will have to borrow to finance some assets, such as our homes or investment properties. The problem arises when we borrow too much money (relative to value) over mega terms for properties that are too big for our basic requirements. 100% mortgages over 35 years that gobble up 35%+ of our income are a step too far.

The bar needs to be reset at 75/80% of Loan to Value over 20/25 years. The size of the house is a personal matter, but stretching yourself to buy a 'bigger' house also carries with it higher maintenance costs, which will be ongoing. Common sense should prevail.

Short-Term

If you need to buy a car and have to borrow to finance it, you should probably only do so once you have 20% of the purchase price saved. The longest term for a car loan should be 5 years and the repayments should cost you no more than 7/8% of your income.

Do bear in mind that the monthly cost of running the car could add about 75% to the cost of your actual loan. Be cautious with what you deem to be affordable, buy second hand and keep the car for 7+ years. Using the words 'car' and 'investment' in the same sentence can be a bit of a contradiction.

Credit Cards

Simple. If you can't afford to pay the full amount off every month, you probably shouldn't have a credit card.

Taxes

Keep your affairs up to date with Revenue and claim for all reliefs/allowances to which you are entitled. There is no point in putting tax issues on the back burner in the hope that they will go away. The last thing you need is getting a demand for taxes owing, with possible penalties and fines, when you can least afford to pay it back.

Financial Advice

Never, ever, take financial advice from a Bank on an investment or pension product where the Investment Company is an integral part of the Bank.

Savings

You should probably target to have enough money in a high yield deposit account to cover your living expenses + mortgage/debt payments for a period of 9 months. Some say that you should save 10% of your income in non-pension savings products. I say, that it depends on your individual circumstances as every ones commitments are different. The 'savings' deposit account should be your first priority. Once you have achieved that milestone, it is then a good idea to start looking at 'investing' in low-cost index tracking unit linked funds.

Family Protection

We have an uncanny habit of going into denial when it comes to taking out life insurance or other protection products that would give security to our dependents. Simply brushing the requirement aside by saying that 'I have a policy' or 'I am covered though work' is not good enough. It is the level of cover, relative to your needs and affordability, that is important. Most 'death-in-service' work related life cover policies insure the employee for 2 or 3 times salary. For someone with dependents, this can be a paltry amount of money. Think 8 to 10 times; and buy convertible term assurance. You will be surprised at how inexpensive it is. Always insure the stay at home spouse, not just the bread-winner.

When it comes to Specified Illness Cover, you should always keep this separate from any life cover you may have for mortgage related debt. It is expensive, so be realistic about what level of cover you might need so that it is affordable.

Pension

If your employer has a facility whereby they will pay into a pension scheme subject to you making a personal contribution, always take this option. If you want to make additional contributions to the pension you should start early. You are not signing a commitment to retirement age so you can reduce or stop payments at a later date.

The general consensus in the market would imply that you will need a fund of 20 times your annual income when you retire. That's fine, if your only retirement asset will be your pension policy but do bear in mind that you will have equity in your home (if you need to downsize) and you will still have an earning potential at 65. If you are a business owner, you should be able to realize a value from the transfer or sale of your business. If you can afford to buy diversified property (commercial/foreign), you should add this to your pension assets.

Summary

It is my opinion that the 'general principals' of financial planning remain intact. The only caveat that I would add is that we will have to be a tad more cautious about taking on too much risk. Asset building should be done slowly and we have to diversify our pot of savings/investments as much as possible.

If you are of the opinion that, on a scale of 1 - 10 (where 1 is 'no' risk and 10 is very high risk), you can stomach a '7' you should probably deem yourself a '5' on the scale. I have yet to come across a case where an investor takes a case against an advisor or product provider for not recommending a higher risk investment.

Tuesday, March 17, 2009

Claiming Tax Relief on Pension or PRSA

If you are an employee who does not contribute to a PRSA / AVC PRSA through salary deduction, you will need to 'manually' apply for Tax Relief from Revenue. You are entitled, subject to certain limits, to have the amount that you contribute to a PRSA/Pension deducted from your gross income before that income becomes liable to tax.

If a contribution exceeds the age or income related Revenue limits in any one year, it can be carried forward for relief in subsequent years. If a contribution is paid after the end of the year, but before the following 31 October, relief may be allowed in the earlier year provided you elect (notify Revenue) to do so on or before the 31 October. If it's an AVC PRSA, you must notify before end of October.

Self-employed taxpayers filing returns under ROS may avail of the extended filing date (mid November) to make an election and pay a contribution to a PRSA/Pension.

The normal procedure is as follows. You will have to write to your local tax office and send them the PRSA1/PRSA2 Certificate that will accompany the PRSA policy document (RAC if it is a Personal Pension), quoting your PPS Number. They will then adjust your tax credits etc.

If you are applying for pension reliefs for previous years, Section 17 of The Finance Act 2003 amends the time limits to 4 years as set out in Section 865 of the Taxes Consolidation Act 1997. Do remember that a claim for relief for 2007 must be submitted to your Tax District before 31st December 2011.

Featured website http://www.prsa.ie/

Edited 24/10/2012

Monday, March 16, 2009

Completing a PRSA Application

The following are some of the common questions that are asked, in respect of the information required, on an Eagle Star/Zurich Life Individual Application Form through www.prsa.ie.

Section A.

Q - Do I need to send a copy of evidence of my date of birth with the application form?
A - Only if your contribution is greater than 15% of Net Relevant Earnings.

Q - Do I need to send a copy of a P60, or other tax document, with the application form?
A - Yes. (The only exception to this is where the contribution is a transfer from another pension arrangement.)

Section C. 1

Q - Can the 'Contract Start Date' be any date in a particular month?
A - No. The 'Contract Start Date' has to be the 1st of a month.

Q - When will the contribution be taken from my bank account?
A - You can choose the 1st, 7th or 15th of the month. You can make a note of your preference on the application.

Section C. 2

Q - My employer has a salary deduction facility with Eagle Star Life through another Intermediary/Broker. Can this 'Execution Only' application be processed on the same Direct Debiting mandate?
A - Yes, if the employer confirms that it is order to do so.

Q - Do I need to sign this Section if I am paying by Direct Debit from my own account?
A - No.

Section E.

Q - Can I choose different funds for my regular and single contribution to my PRSA?
A - Yes.

Standalone PRSA-AVC

Sections D & E

Q - Is all the information required in these sections?
A - Yes.

Section G.

Q - Can I choose different funds for my regular and single contribution to my PRSA?
A - Yes.

Monday, March 9, 2009

Self-Investing

When we think about investments, we normally think about them in terms of property,equities or bonds. The current economic climate dictates that the market for these investment assets is very weak at present. When you couple this with negative consumer sentiment and the continuing uncertainty, immediate new opportunities for these products looks bleak.

That said, it is probably a good time to review your existing investments. If you were running your own business, you would certainly be scrutinizing your cost-base at present and be looking for more cost effective solutions to reduce overheads.

The 'easiest' investment opportunity is the one where the least amount of effort is required. We tend to pass our hard earned cash on to someone who will advise us on where we should be putting our money for future growth. In the current environment, it may be a good idea to consider investing more of that money, in yourself.

If you ask yourself the question "How can I add value to my business/career for the long term?", you will probably come up with an answer that incorporates some sort of immediate sacrifice and hard work. The trouble with this is that the results may not be tangible or easily measured any time soon, but if you have a plan and put the effort in the long term pay-off will be worth it.

If you are a business owner you may need to sit down and write a 5 year plan. Running your business on a year to year basis is not a good place to be at. In boom times this may work out fine but when things start to head south, it is hard to adjust to the circumstances with any degree of pace. It may even be necessary to alter or change the current business model that you adopt.

So, what can you invest in? Perhaps it is a good time to (i) promote staff development (ii) invest in new technology or equipment (iii) get to know your customers better (iv) advertise or (v) diversify into a totally new uncorrelated business. Any one of these has the potential to add to the value of your business assets.

If you are an employee, you could just as easily substitute the word 'career' for business and diversify your skills to include things like (i) an additional language (ii) computer literacy (iii) personal finance education or (iv) work on any perceived weakness that you may have.

Irrespective of your trade or profession, now is a good time to take stock of your life and invest in something that will add value to your earning potential in the years ahead. Others will be just marking time/trying to survive at present so the opportunity is there to try and steal a march on the competition by being proactive in your approach to your business/career.