Beware ‘free’ offers: here are five things that will still cost you

‘Cashback’ sounds nice till you work out that in the bigger picture you’re still losing out

Public hospital care is not “free” as  patients must pay €75 a night for up to ten nights. Photograph: Peter Byrne/PA Wire

Public hospital care is not “free” as patients must pay €75 a night for up to ten nights. Photograph: Peter Byrne/PA Wire

 

Who doesn’t love getting something free? It’s hard not to feel a moment of joy when you’re gifted something unexpected.

When it comes to our finances, however, we’re often faced with tempting offers that need a bit of consideration before we get too excited. A little bit of information and knowledge can help you sift through the real “deals” and those that are that little bit less attractive when you peer behind them.

“Cashback” on your property purchase

Soon, home buyers might start to feel as if they’ve won the lottery, thanks to cashback offers being flung at them from all directions.

The Government has announced a tax rebate of as much as €20,000 on the purchase of new homes for first-time buyers. However, the benefits of this “bonus” may be less than homebuyers might hope for.

The precursor to this deal was the original first-time buyer’s grant, which ran from 1977 until it was abolished in 2002, when it was worth €3,810. At the time, then minister for the environment Martin Cullen said the grant had “returned little benefit to consumers” and had “simply been absorbed in the increased profits of builders” as it had helped to push up house prices.

New home buyers will be hoping the same thing doesn’t happen this time around, or the benefit of the rebate will be wiped out by the higher cost of their home.

Second, depending on which bank you plump for, you might be the recipient of a cashback of as much as 3 per cent of the value of your mortgage.

Bank of Ireland, for example, is offering its customers 2 per cent cashback upfront, plus an additional 1 per cent back within five years , provided you’re still a customer of the bank. EBS is offering a cashback of 2 per cent, while Permanent TSB is also offering 2 per cent.

While it’s hard to suggest that this isn’t an attractive offer, the reality is that if you could have got a cheaper mortgage, you would have saved significantly more money.

As has repeatedly been pointed out, Irish homeowners are paying considerably more than their European peers; you can get a 20-year mortgage in France, for example, at a fixed rate of 1.85 per cent, while Irish rates continue to stay stubbornly north of 3 per cent.

However, there are signs, finally, of decent competition emerging. KBC Bank recently opted to reduce its lowest rate – on a one-year fixed mortgage (LTV<90%) – to a market-beating 2.9 per cent. But in general, rates remain high.

Consider the example of someone getting a 30-year €250,000 mortgage on a property valued at €300,000.

With Bank of Ireland, for example, this person would qualify for a cashback of €5,000 initially, with a further €2,500 to be potentially paid out within five years.

The best rate the bank offers someone with a LTV of more than 80 per cent is 3.45 per cent, which means that over 30 years (if the rate remained the same) the homeowner would have a monthly repayment of €,1,115 and a total interest bill of about €151,000. If, on the other hand, you got a French mortgage fixed at 2.3 per cent over 30 years, your monthly repayments would be just €962, and your total interest bill would be about €96,000, or some €55,000 less.

So, while undoubtedly attractive, lower interest rates, rather than punter- friendly cashbacks, would be in customers’ best interests.

A hospital bed

Whether or not you have public health insurance doesn’t really matter, because care in a public hospital is free, right? Well, not quite. Many people are unaware of this but, unless you have a medical card, if you are a public patient in a public hospital, you must pay a nightly charge for your care.

The charge is €75 per day, up to a maximum of 10 days in any 12 consecutive months (€750), and while there are exceptions, such as babies under the age of six weeks and pregnant women, it’s likely that if you find yourself in hospital, you will have to pay the charge.

A follow-up point to note is that the cost of any public hospital stay will be eligible for tax relief at the standard rate of 20 per cent.

Financial advice

Tempting, isn’t it? You’re in the queue to make a transaction when you see a poster or a flyer. You know it’s something you should do, but it’s just one of those things you have never got around to. And now you’re being offered a free review in your local branch.

Sometimes you don’t even have to leave the comfort of your own home. Irish Life for example, offers a “no obligation, free of charge, full financial review” which can be done face-to-face or over the phone/online with a teleadvisor. The review typically lasts about 45-60 minutes and focuses on identifying your needs and priorities.

While it should be stressed that such reviews don’t carry an obligation to purchase, after almost one hour speaking with someone, it’s likely that you’ll agree to some kind of policy with the financial services group. And this may even be in your best interests.

The problem, however, is that this kind of “tied agent” adviser, which only offers the products of the agent with whom it has an agreement, can’t shop around on your behalf, and therefore you may not end up getting the best deal.

Irish Life Financial Advisors for example, is a tied agent of Irish Life; Bank of Ireland offers New Ireland products, and AIB also sells life and pension products from Irish Life.

Shopping around can have a significant impact on your finances. Remember, a fund that levies 2 per cent a year in management charges will set you back about €15,000 in fees and earnings forgone over the life of a 10-year, €50,000 investment. Compare this with just €4,000 in fees it would have cost if the fund charged 0.5 per cent only.

Similar savings can be found on everything from life protection to pensions.

Another issue is that taking out an investment or protection policy may not be the best option for you; paying down debt might be your priority,

As an alternative, you could seek out a multi-agency intermediary, which can sell and advise on products from a number of firms; or an authorised adviser which can provide products from all providers in the market. The advantage of going down this route is that your adviser should be able to discuss a much wider range of financial products. However, they may not be as independent as you might wish.

So don’t be too reluctant to sidestep “free” advice and pay for it up-front. It may end up paying for itself in the long run.

The state pension

It’s offered at a rate of up to €233 a week (€238 from March 2017) and, for many of us, it’s seen as a right after our many years of toil in the workforce – never mind all those PRSI contributions made during a working lifetime.

However, what you may not realise is that you’re not necessarily entitled to keep all of the €238. According to the taxman, it’s income and therefore must be subject to tax. If the State pension is your only income, tax will not be an issue but if you have income from a private pension or from other sources, it is something you need to take into account.

While pensioners are likely to understand their tax obligations after the Revenue Commissioners made a concerted effort a few years ago to collect unpaid tax on the state pension, those who are still some years away from retirement may not be aware that, depending on their other sources of income, this is not a free welfare payment, it is taxable income. If you don’t allow for the prospect of that €12,376 or so being taxed, it can throw your retirement planning figures out of whack.

While retirees don’t pay PRSI (4 per cent) and pay a reduced rate of USC (2.5 per cent) once they turn 70 and their income doesn’t exceed €60,000, if they have a hefty private pension they could pay income tax at a rate of up to 40 per cent.

And it’s not the only benefit that’s taxed; maternity and paternity benefit, both of which are paid at a rate of €230, are also taxable. So if you’re getting a top-up from your employer, these benefits may be hit also.

Subsidised health insurance

If your employer offers you a subsidy towards – or meets the full cost of – health insurance for you and your family, you probably feel rightly blessed. After all, the cost of health insurance has soared dramatically in recent years.

Figures show that about 400,000 people, or about 18.8 per cent of those who have private cover, across the State, have their premiums paid by their employer. But this doesn’t mean the “benefit” your employer so kindly offers is “free”; the employee must also stump up for the cost, as Revenue imposes “benefit-in-kind” on health insurance.

Consider someone receiving a subsidy of €3,000 a year towards the cost of their family’s health insurance. As this is net of tax relief of 20 per cent, the full cost of the policy is 3,600.

Now the employee pays tax at the higher rate (52 per cent including PRSI/USC) which means that their employer is taking a deduction of about €156 a month or €1,872 every year from the employee. You may have wondered where this money was going in the past, or you may not have noticed, but it is going towards the cost of your health cover.

But there is a bit of a bright side to this. As mentioned above, health insurance premiums are eligible for tax relief at a rate of 20 per cent – although since Budget 2014 this is limited to €1,000 for each adult and €500 for each child. Most people, however, won’t be hit by this limit.

So, that bill of €1,872 should drop to a little less than €1,500 – still a sizeable contribution, then, on your part, but significantly less than the €3,000 you would have otherwise paid.

If you do find out that you haven’t benefited from this tax relief, remember that you can apply to Revenue for a refund, and you are entitled to go back four years. So, annual premiums of €2,500 a year would be €10,000 over four years. Applying a discount of 20 per cent could see you in line for a rebate of a not insignificant €2,000, or almost the cost of year’s insurance (if it hasn’t increased again).

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