MAKING CENTS: Your financial questions answered
Let Limerick’s expert help you out today
Question
I have a son who just turned two years old. And I am looking to save an amount each month for his future. At the moment I have €1,800 in a Credit Union account and I am saving €300 a month into it. Is there a better place I could be saving this money into as I also plan to put lump sums into it – when I get an annual bonus/or if he receives money from grandparents for birthdays, Christmas, holy communion etc.
Answer
The returns for saving monies on deposit with banks and credit unions are low and aren’t keeping up with inflation. You need to get a net return of c. 4% if you want your savings to just hold their value and with regular savings rates from most banks at 3% gross which after tax is 2%, so in real terms you’re actually losing money.
And the rate is even lower with lump sum lodgements where rates from Irish banks range from 0.01% to 0.75% in instances where you want immediate access to your money.
So, if you save for example €1,800 and follow this up with monthly lodgements of €300 and you get a net blended annual return of say 1.5% after tax and it stays that way for the next 16 years’ when your son is 18, you’ll end up with a balance of €67,342, of which €7,942 was the interest earned.
The solution to possibly earning more than this is by saving into an equity-based account.
Let me explain.
If you save the same amounts I’ve just referred to over the same term (16 years) but you get a return of 5% per annum, you’d end up with €91,972 of which €32,572 was interest earned.
So, the same amount is saved each month along with the same initial lodgement and over the exact same term the difference between both accounts is €24,630, so the account matters, it matters a lot.
And is 5% per year achievable?
If we look at cold hard factual data, then it certainly is and I’m going to send you a factsheet for a fund I particularly like and one we use and recommend for people like you.
And when you read it you’ll see that over 1 year the fund had returns of +28.1%, over 3 years +20% per year, over 5 years +12.6% per year, over 10 years +14.1% per year and for the past 25 years +8.9% per year.
You have immediate access to funds without penalty and there are no entry charges either and the annual management charge is 0.75% which is very low given how well the fund has performed.
When it comes to investing in accounts like this one, as I see it there are two upsides and one downside.
The two upsides are (a) better returns than having money on deposit and (b) you have immediate access to money i.e. you are not signing up to any set period of time, you can leave the account in place for as long as you like i.e. 2 weeks, 2 months, 2 years, 5 years etc. so it’s up to you and you don’t have to specify any time period.
The one downside is that your capital is not guaranteed. But I don’t think that should be any concern particularly when you are investing for the length of time you will be saving for and the second reason I don’t think you need to be concerned is because of how well diversified this particular fund is i.e. it invests in 50 different companies in 5 different sectors and the % invested in each company can change every month as do the companies i.e. they are not fixed and new companies are brought in if its felt there is an opportunity for them to make money and others are removed if they aren’t.
There are many different things you have to think about when considering what type of an account is best suited to you and your son’s money and if an account is earning less than 2% and you’re happy with that, that’s fine as well. The purpose telling you about other accounts and to show you the potential difference between what you have and what you could have, is to show you what options are available that you may not have known about and/or considered.
Question
Liam, my query is in relation to me having numerous insurance policies and I don’t know what I need to have in place and what I don’t. I have benefits through my employer which is why I’m wondering do I need some of the personal policies I took out. While I want to ensure I have sufficient cover I also want to see if I can save money each month because we’re beginning to feel the pinch which is why I’m currently reviewing my direct debits to see if there are any savings or cuts I can make. I’m attaching the details of what I have in place and what benefits I have from my employer as well.
Answer
Thanks for sending on your insurance policy details which I have reviewed and my comments on same are as follows:
Life Choice Home - Policy Number: XXXXXXXX
This is a mortgage protection policy and is assigned to the mortgage you have with your lender and it’s a mandatory form of life cover and one you have to have in place. So, if anything God forbid happens to you, the proceeds of the policy are paid directly to your lender who use them to pay off your mortgage in full.
And I’ve checked the premium and its excellent and can’t be improved on so my advice here is nothing to do, leave it in place because you have to but know the monthly premium is the lowest you can pay.
Life Choice - Policy Number: XXXXXXXX
This is a term assurance policy and is owned by you and is paid to your estate in the event of your death. The premium is very good at €45.72 (incl gov levy) and I looked at all of the providers to see what their premiums would be now if you took out a similar policy with the same amount of cover for the same duration and the best premium quoted was €66.83, so the premium is excellent and the reason why your existing policy is better than the premiums now being quoted is because you were 14 years younger when you took out your existing policy.
And whilst you have a death in service benefit with your current employer (4 times your salary), I think it’s important to have a separate policy that you own yourself. My advice to people is always not to only rely on a death in service benefit because if you ever left your current employer then that death in service benefit is gone and then you have no cover in place and if you needed to take out a new policy it would become more expensive because you are older. And you may not even get cover if your health changed and insurers could decline you because of that. So, the cover you have with this policy is excellent and I particularly like the serious illness element to it, so my strong advice to you with this policy is to keep it, it’s very good and I repeat important to own a life assurance policy in your own right.
Personal Income Protection - Policy Number: XXXXXXXX
Okay, the cover you have in place at the moment through your employer is excellent i.e. 100% of your salary less social welfare payment is paid for the first 26 weeks and then 75% of salary is paid indefinitely from week 26 onwards less social welfare payment.
The maximum you are allowed to be paid when out of work on long term sick leave is 75% of salary less social welfare payment which means the policy you have in place would never be paid and that’s because when combined with your employer’s benefit would exceed the 75% threshold. So, if you were making a claim on this policy, when the insurers discover what your employer is paying you, they wouldn’t pay you anything.
Which means that if you stay with your current employer the policy you are paying for each month will never pay out.
The only reason you would consider holding on to it is, if you thought you might move from your current employer in the future. Because if you ever joined another company and they didn’t have a group income protection policy like your current employers, then you’d need to protect your income yourself because you’d only be in receipt then of a social welfare payment if you were out of work due to sick leave.
But if you don’t see yourself moving, then for sure I’d cancel this policy because as I said earlier, at the moment you are paying a monthly premium for a policy that won’t pay you anything if you were out of work sick.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey