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17/09/2021

Making Cents - Time for questions and answers

Making Cents

There are no stupid questions when it comes to financial advise

I get a huge amount of questions from readers each week and it can be difficult to find space to include them in my column, particularly when I’m writing about a specific topic. So, this and next week I decided I would focus exclusively on sharing questions I’ve received over the past number of weeks and months with you, and the answers I gave to each.

And I’m summarising some of the questions. They can be a lot longer and more detailed so for brevity, I’m keeping them concise and to the point.

Question

Liam, I invested €45,000 at the start of the year in a diversified growth fund recommended by broker. The fund is now valued at €42,895 and I’m paying management fees of 1.4%. Is this fee very high are there alternatives I should be considering?

Answer

The fee you’re being charged is extremely high.

So far this year, the fund manager has collected €630 in fees from you, and you’re down €3,105. Now I don’t mind paying someone if they’re making money for me, but I have a serious problem when they’re not.

I know the fund you’re referring to and I know of other funds similar in risk profile to it where the management fee is 0.60%. I know of one fund that year to date is +1.7%. and had you invested in it, your investment would be worth €45,765 and the fees paid €270.

When you put both alongside each other, you’ll see that you can pay .80% less in fees and achieve a higher return with one, but unfortunately, it’s not the one you’re invested in. And if both funds achieved the same return over 10-years, yours would be €5,125 less because of the excessive amount you’re paying. That’s the impact fees can have on your bottom line and that’s a best-case scenario by the way.

And I’m wondering why the broker recommended that particular fund for you? Are they a tied agent and can only recommend that particular provider?

My advice is to go back to your broker and question them on the fund choice, and the fee being charged on your account. You need to change both and change them quickly.

Question

Liam, I’ve inherited some money (€35,000) and not sure whether I should use it to pay down my mortgage or invest it. Prior to receiving this money, I had some savings but not a lot either. I just don’t know what the impact would be or if there’s a better way. I’m on a variable rate and I’m 5 years into a 25-year mortgage and I originally borrowed €310,000.

Answer

When you make a lump sum payment against your mortgage you can either (a) reduce your monthly repayment and maintain existing term or (b) maintain existing repayment and reduce the term.

If you were to take €35,000 off your mortgage and lowered your repayment, you’d see a reduction of c. €175 per month. The interest savings over the term remaining with this strategy are c. €10,190.

Should you opt to reduce the term, you’d become mortgage free 3 years 8 months faster and save c. €30,932 in interest payments in the process.

Clearly reducing the term has the biggest impact of both scenarios, but I’m concerned that if you used all of these monies, and you suffered an income shock in the future i.e. you became redundant or ill or anything which had an impact on your ability to earn an income, how long would it be before you ran out of money and were unable to pay your mortgage?

There’s no point having lower monthly repayments or reducing your term, if you don’t have an income or savings to make monthly repayments. A lower balance or shorter term doesn’t pay the monthly instalment.

Having said that, I do think you can find a happy medium which allows you to optimise this inheritance, whilst giving you the peace of mind, knowing that if anything was to happen in the future you’d have significant savings in place to buffer any shock.

And you can achieve this by making monthly overpayments each month, using your €35,000.

Use it as a feeder to make monthly overpayments, and if you did, and you sent €300 from it every month to your mortgage, you’d reduce the term of your mortgage by 53 months, saving you €24,316 in interest payments. This strategy reduces the term faster and you don’t have to go from €35,000 to €0 either, you’re just reducing it by €300 every month.

And if anything did happen and you needed access to that money for whatever reason, it would be there for you.

For example, if something unexpected happened in 4 years’ time, you’d still have €20,600 in your account.

Question

Liam, my wife has just been made redundant and received a termination payment of €38,000. Our daughter is planning on going to college next year and will be applying for a grant. Will the amount my wife received have any impact on the amount she may qualify for?

Answer

It might and let me explain why.

When a student is applying for a grant, their eligibility for one is means tested with reference to how close they live to the college they’re going to attend and what gross income, they or their parents are in receipt of.

And there are two types of grants, one which covers the cost of living expenses incurred whilst at college, and the other which covers fee’s i.e. registration fee, cost of field trips etc.

If the student lives less than 45km away the amount falls under an adjacent rate and more than 45km it’s a non-adjacent rate.

Next up, is how much income the household earns and this is where your savings are a factor, because the amount your daughter may qualify for is based on the total ‘reckonable’ income of the household, and that can come from a variety of sources i.e. earned PAYE or self-employed income, and income from savings, pensions, property and lump sum payments from redundancy and retirement are taken into consideration as well.

If you invest some or all, of your termination payment, the interest that’s accumulated and paid out at maturity is regarded as an additional source of income. If, for example you invested the €38,000 into An Post’s savings certs for three years at 1%, the amount of interest you’d earn is €380. That amount is divided by the time it was invested, to determine the additional income you were in receipt of in a particular year, so in this instance €126.67 is added to your other sources of income.

And if the ‘reckonable’ income from all sources is less than €24,500, the adjacent award is €2,375 and the non-adjacent award €5,915.

The grant awarded reduces as the household income increases.

For example, if the household income is less than €24,5000 but greater than €39,875 the adjacent amount becomes €1,215 and non-adjacent, €3,025.

If your income is greater than €39,875 and less than €45,790 the adjacent rate that’s payable is €305 and €795 for the non-adjacent rate.

The maximum income threshold to qualify for a grant by the way is €54,630, and anything above is deemed too high and no grant will be paid.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or harmonics.ie

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