2012: the year that was . . .
There was plenty to pique the interest of savers and investors in 2012 – and a lot more to come in 20131 The flight to safe havens continued
For the first half of the year, savers continued to take fright at the scale of the euro zone crisis, and ploughed their money into safe havens such as gold and German bunds. However, after ECB president Mario Draghi’s pronouncements on saving the euro during the summer, the pressure eased.
“There has been a small, albeit gradual shift away from safe-haven investing,” notes Ian Quigley, director of investment strategy with NCB Stockbrokers.
With many investors opting to place their money in short-term German bunds, when they come to maturity this trend is likely to gain pace, as fears over the euro zone crisis subside and investors opt to bring their deposits home to Ireland.
2 Health insurance got more expensive
The Irish health insurance market finally welcomed a new entrant in 2012 in the form of GloHealth; whether or not it can stem the tide of price increases remains to be seen, however. Since 2011, Irish consumers have had to stomach almost 15 price increases, pushing 60,000 people out of private health cover in 2012 alone.
And with more hikes on the way in 2013, as the Government implements its plans for risk equalisation and a permanent health levy, the expectation is that more consumers will give up their cover to take their chances on the public health system.
Already, Aviva has signalled that it will increase the cost of six plans on January 1st, while the VHI is to increase the cost of its Healthsteps Gold plan on the same date to €320. This trend is going to run and run.
3 Ulster Bank messed up its systems
It should have been a routine technological update but an error in its systems caused chaos for thousands of Ulster Bank customers last summer. The problems led to disruptions for more than two weeks, with branches inundated with customers who availed of extended opening hours to try and conduct basic banking transactions.
Royal Bank of Scotland chief executive Stephen Hester flew into Dublin to try and deal with the situation, as people showed up to branches with hard copy payslips looking to withdraw their salaries, even though the bank couldn’t keep an electronic record of the transaction. In the end, the issues were fixed but the debacle could end up costing the bank €100 million – while the cost to its reputation may hurt even more.
4 Deposit rates started to slide
As the balance sheet of the domestic banks finally start to appear more robust, the desperate dash to shore up deposits is coming to an end, and a sense of reality is returning to the savings market.
With a European rate of just 0.75 per cent, Irish banks were paying out far more in interest than was logical, while at the same time had to pay elevated rates to fund themselves.
Now banks are in a better position to reduce rates and turn their attention to making profits again. Unfortunately, this means it will be harder to earn a return, as deposit rates are pushed downwards across the board.
Take regular savings, for example. In October 2011, EBS was offering 5 per cent on its regular savings account, for amounts between €100 and €1,000.
Now, however, you can expect to earn just 3.1 per cent, while Investec was offering 4 per cent on a 12-month fixed term, but this has since dropped back to 2.6 per cent.
5 Men and women are equal . . . unfortunately
For centuries, women have fought for equality in politics, education, the workplace . . . and now the introduction of the EU’s gender directive means that both men and women will be treated equally when it comes to buying insurance premiums. But this time round, women might be ruing the decision.
From December 21st, insurers will no longer be able to calculate insurance premiums based on gender. This means that the lower prices women have typically enjoyed on insurance products such as car and life, may be a thing of the past, as insurers rebalance their books.
According to Padraig Lynch, chief executive of Chill Insurance, the cost of premiums for female drivers are likely to rise, but men should see their premiums coming down. This will be most beneficial to young male drivers, who have typically had to pay significant sums of money to get covered.
However, he adds that it may also be an opportunity for consumers, as insurers tweak their books and change their rates.
“The first six months of the year will be very volatile as companies try and figure it out,” he says.
In this regard, his message is to shop around and find an insurer that offers you the best value.
6 Farewell to free banking
It was good while it lasted, but 2012 signalled the end for free banking. While free banking still exists technically, the amounts you are required to keep in your current account are so high that it’s unlikely to be a realistic goal for many.
AIB, for example, requires customers to keep a minimum daily credit balance of €2,500 for the full quarter to avoid quarterly maintenance fees of €4.50, as well as day-to-day transaction charges ranging from 20 to 30 cent.
Bank of Ireland customers must now keep a balance of €3,000 to avoid quarterly charges of €11.40 (for up to 90 transactions), while Ulster Bank charges customers of the bank a quarterly fee ranging from €30 to €42.
AIB- owned EBS has the lightest requirements at present. To qualify for free banking with the building society, you need to have at least €1,500 lodged to your account each month, or keep a minimum balance of €500.
2013: the year that will be . . .
1 A move towards paid financial advice
From January 1st, UK-based financial advisers will no longer be able to earn commission from selling financial products, and will instead have to charge a fee for their services.
While the Irish authorities appear to be against such a move – opting instead to require financial advisers to disclose the commission they earn – it’s a trend that is also likely to gain pace this side of the Irish Sea in 2013.
Joe McGuinness, managing director of Framework Financial, became a convert to charging for his advice about four years ago.
“The financial services industry in Ireland is very product- or sales-driven – very commission-driven to an extent,” he says, adding that he thinks it best to focus on a person’s financial objectives.
He charges from €500 a year for his services, which may appear steep to some people. However, whether it’s a “free financial healthcheck” at the local branch of your bank, or a consultation with a commission-based broker, there is usually a cost involved to the consumer – whether it’s a poor product offering or higher fees.
“The consumer always pays – we’re saying, ‘How do you want to pay?’” says McGuinness, adding that he is seeing more of a movement from “savvy” investors to paying for financial advice.
2 An Post will be back in fashion
It may have sent some investors running in the depths of the banking and economic crisis, due to its links with the State, but savers are likely to come back to An Post in their droves in 2013. After all, with Dirt having been increased to 33 per cent in the most recent budget, the ability to earn tax-free savings will be attractive to many.
For example, a deposit of €10,000 will reap €1,000 in interest, earned at 3.23 per cent, over a period of three years. But if you made that return with a bank, you’ll have to hand over €330 to the Government in tax. With An Post, you get to keep it all.
3 More expensive mortgages
Despite much speculation, mortgage interest relief was not extended in December’s Budget. This means that anyone buying a home in 2013 will not be entitled to relief on any mortgage interest that they pay, making the transaction that bit more expensive. For example, a first-time buyer who bought in 2012 will pay up to €2,500 less to service their mortgage this year.
On top of this, potential homeowners will also have to pay higher interest rates as banks put up their rates in an effort to boost their margins and start making profits again.
4 A switch back to equities?
If bonds were where it was at in 2012, investors might want to start rebalancing their portfolios by allocating to equities in 2013. After all, with safe haven bonds offering negative yields, assuming some risk is likely to come back into play.
“Clients are now having a growing appreciation for the fact that fixed-income investing is giving them a negative return after factoring in inflation,” notes Ian Quigley of NCB Stockbrokers, adding, “Our message is that if a client wants to protect the purchasing power of their capital they will have to take on some risk.”
He favours an approach that includes high-quality equities and other diversified equity strategies, but notes that while equities might be at their cheapest ever almost when compared with bonds, equities themselves may be a bit over-bought.
“US equities are looking a little expensive, but European equities offer reasonable long-term value,” Quigley notes.
According to Quigley, the recent increase in capital gains tax in the Budget to 33 per cent won’t be a “game changer” for many when it comes to investing in equities. Indeed, for those carrying forward losses, equities, unlike fixed income products, allow the possibility of offsetting any taxes on gains you might make.
For those investors who aren’t waiting to use losses incurred on AIB or Anglo Irish Bank, for example, a collective investment fund has the appeal of allowing you to build up an equity investment on a gross roll-up basis with taxes only due at maturity.
Also on the tax front, investors wanting to pursue a dividend stock strategy should remember that from 2014, PRSI will also be applied to dividend income.
5 Early access to pensions
Following a decision in December’s Budget, those who have built up private pensions through additional voluntary contributions (AVCs), but who are now in financial difficulties, will be able to access their their pensions early for the first time. People will be able to withdraw up to 30 per cent of their AVC fund for three years.
Ciaran Phelan, chief executive of the Irish Brokers Association, who had lobbied the Government on the issue, welcomes the move.
“It’s positive that they are allowing people to have access to their savings, but it wouldn’t have been our way of doing it,” he says, adding that he would have liked to see people getting access to the tax-free sum they are due at retirement, now. Instead, people will be taxed on withdrawals at the full rate.
In addition, whether or not a significant numbers of people will be able to avail of the ruling will depend on further clarification in the Finance Bill 2013. It is as yet unclear if it applies solely to AVCs that people in corporate pensions have contributed, or whether or not it has a broader application and also includes self-employed people who have built up their own pension pot.
“If it was extended it would have a huge advantage,” notes Phelan.