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Friday 28 July 2017

How to beat the New Year's financial trials

Over 400,000 health insurance customers will be among the first to face price hikes

By Tom Halliday
By Tom Halliday
Louise McBride

Louise McBride

Rising rents, double-digit price increases in health insurance, and the closure of work pension schemes will be some of the biggest financial challenges facing many people in 2017. Make it your resolution to tackle those challenges this year. Here's how to.

Get a better health insurance deal

More than 400,000 people are due to renew their private health insurance this month - and double-digit price hikes will be one of the biggest challenges facing them.

"Some of the health insurers have just imposed their third price increase in the past 12 months - and these price hikes range from 5pc to 25pc," said Barbara Sheahan, head of health insurance with healthinsurancehelp.ie.

If the cost of your cover is soaring, review your insurance and see if you can get a better deal by changing your plan and insurer.

"Anybody on the same plan for the last three years is most likely overpaying for their health insurance," said Sheahan. "Ask the various companies what the best plan is which they can offer you to suit your budget - including all corporate plans."

However, don't be tempted to go for a very cheap plan. "Remember, the government levy on most private health insurance plans is €403 per adult - so if you are not paying much more than this, you can expect to have very limited cover," said Sheahan. "If it is within your budget, €1,200 will give you a decent plan with strong inpatient [treatment which requires an overnight hospital stay] and outpatient cover [for daytime procedures in hospital]."

Should you be changing your plan or insurer, do not downgrade your cover for hospital care - unless you are paying for cover for top-of-the-range hospital care which you're very unlikely to ever need. "If you need to reduce your premium, take on an excess [the first part of a claim you pay yourself] rather than downgrading your hospital cover," adds Sheahan.

"A lot of consumers downgrade their hospital cover when trying to save money - without giving proper thought to the implications when a claim arises."

Face up to the hole in your work pension

One of the biggest challenges facing many of those with work pensions this year will be the ongoing demise of defined benefit (DB) schemes. With DB schemes, you usually get a percentage of your salary when you retire. They are different to defined contribution (DC) schemes, where the pension you get depends on how much money you and your employer (if it does so) saves into the scheme - and how well that money has been invested.

Many DB schemes are in financial difficulty so a lot of members are only getting a fraction of the pension they expected - indeed, some have even lost their entire pension. Many employers have wound up their DB schemes in recent years. There has been an increasing move towards DC schemes as a result.

So should you be in a DB scheme, make it your resolution to find out exactly how safe your pension is - and to do what you can to protect it. Make sure you know whether or not the scheme has any shortfall - and if there are any plans to wind up the scheme.

"Get an understanding of what the funding position of the DB scheme is," said Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF). "Members of DB schemes are obliged to get information every year. Read that information and if it's not clear, ask the human resources department or the trustees of the scheme what the situation with the scheme is."

The funding position of your DB scheme will tell you how well funded (or not) the scheme is. You will find the exact funding position of your scheme in its latest actuarial valuation - which should be in the scheme's annual report .

Should you be concerned that your DB scheme is running out of money, it may be prudent to take action now to protect your pension. Consider taking a transfer value from the scheme - if you have left service. A transfer value allows you to transfer the benefits you have built up in the scheme elsewhere - before they can be eroded any further. Your pension will usually still take a hit if you take a transfer value and your scheme is running out of money - as your transfer value is typically reduced to reflect the shortfall in the scheme, according to Moriarty. So if your DB scheme has a shortfall of 25pc, for example, the pension benefits you have built up could also be reduced by 25pc.

Some schemes are offering enhanced transfer values - where you get a better transfer value than a shortfall in a DB scheme would typically allow for - to members of DB schemes who have already left service. These enhanced transfer values are being offered to try to encourage such members to leave DB schemes.

"Weigh up if it's in your interest to accept the enhanced transfer value - and get financial advice before you make any decision," said Moriarty.

You usually cannot get a transfer value if you're still working with the company that's offering the DB scheme - but you could consider paying additional voluntary contributions (AVCs) into a separate DC pension scheme. These AVCs will top up the pension you get from your DB scheme and will be in a separate pension pot so they won't be affected by any problems in the DB scheme.

Protect your investments from inflation

Inflation is expected to tick up in Britain under Brexit - and in the United States under its president-elect, Donald Trump. This is one of the biggest challenges facing investors this year. So one resolution worth making in 2017 is to protect your investments from inflation.

"Invest in real assets - such as equities and property - as these tend to do well when inflation rises," said Brian O'Reilly, head of global investment strategy with Davy. "Avoid nominal assets, such as bonds, as these don't do well when inflation rises."

Last month, the US central bank, the Federal Reserve, increased US interest rates for the first time in 2016 - and the second time in a decade.

Should inflation pick up, there are likely to be more interest rate rises in the US, according to O'Reilly. "Investors don't want to be in bond proxies within the equity market if interest rates pick up - that is, in companies that tend to fund themselves through debt, such as telcos or utilities," said O'Reilly. "If interest rates rise, their refinancing gets more expensive."

Investors in global REITs (real estate investment trusts) could also lose out if inflation picks up - because REITs tend to raise a lot of debt, according to O'Reilly.

Investing in the shares of technology companies and US banks could help beat inflation. "Tech companies tend to be less impacted by inflation as they have no debt and a lot of cash," said O'Reilly. "Tech companies could also do well if Donald Trump brings in a corporate tax cash holiday - as you'll probably see a pick up in mergers and acquisitions."

Tidy up your finances - if you want to buy a home

With rents continuing to soar, it would make financial sense for many tenants to buy their own home - provided they can secure and commit to a mortgage.

Should you want to get a mortgage this year, one of the best things you can do is review and tidy up your finances, according to Michael Dowling, chairman of the Irish Brokers Association mortgage committee.

"A lot of borrowers have the salary to qualify for a particular mortgage - but they can't get that mortgage when they apply for it because of how they spend their money and how they manage their current account," said Dowling. "By adjusting their lifestyle spending and cleaning up their current account however, they have a better chance of getting the mortgage they'd typically qualify for - based on their salary."

So to help secure your mortgage, avoid spending more than you earn, stop running up overdrafts on your current account, make sure you have enough money in your account to clear monthly bills, and don't engage in financial habits (such as online gambling or lavish credit card spending) that are likely to see your lender turn its nose up at you.

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