What are you post Covid spending plans?

Personal finance columnist Jill Kerby looks at what spending choices will you be making when the lockdown is over and how will the experience of the last year influence them?

Despite the slow rollout of the coronavirus vaccines, plans are afoot in many households to start the process of returning to normal life, mainly, it would seem, by booking a domestic holiday sometime this summer. For older people who have received their two vaccinations, flights are being booked to visit friends and family, or to take a holiday abroad – the assumption being that you will be let in on production of your EU vaccine passport.

While travel and holidays will be high on lots of people’s lists in the months after the pandemic eases, it probably only represents a fairly small proportion of the spending that could occur.

A just released study by a building society in Scotland, with a similar size population as our own, and by the Centre for Economics and Business Research (CEBR) showed that UK households intend to spend about 26% of the savings they achieved during lockdown, worth about £192 billion, and the Bank of England expect about 5% of that sum to be spent as soon as restrictions are lifted in early summer.

Here the saving record is just as strong with household savings increasing each quarter of the pandemic by about €600 million. At the end of Q3, 2020 the Central Bank reported that household savings had reached €6.4 billion and net household worth rising to €831 billion.

With deposit yields effectively at zero, the temptation is spend the c€145 billion sitting in bank/credit union accounts and in An Post savings, is going to be very strong and the question is now whether the government should even bother to incentivise the expected consumer boom.

The downside of the release of postponed spending is that we could certainly see a mini-price surge in all sorts of goods and services, as people who are trying to book summer cottages have already experienced. Not only could the cost of drink (in pubs especially) and dining out go up as those businesses try to make up for lost turnover and to repay their emergency bankloans, but for much bigger ticket purchases like homes, as that pent-up demand is realized.

Killing the golden consumer goose, or even plucking too many of its feathers (something state finance ministers struggle with as they prepare their annual budgets) could be counter productive and drive Irish buyers back to cheaper, overseas goods providers.

‘Buy local’ campaigns have been hugely successful, helped by state support for small businesses and craftworkers who needed to beef up their online presence, but they will also need to emphasise the need for ongoing support for our high streets if they are to fully recover from the months of lost business.

With the national debt creeping towards €260 million and unemployment unlikely to return to pre-Covid levels much before 2023, according to the latest ESRI forecast, we might all want to set aside some time for some strategic spending, in addition to pouring over those tempting holiday and eCar brochures.

The State pandemic bill – over €4 billion alone on employment support payments – will have to be paid off, probably from higher taxation on capital gains, inheritances, property, utilities; by higher PRSI payments and all sorts of extra and new stamp duties or ‘levies’.

With so much cash sitting unproductively in bank accounts, the temptation for the Minister for Finance will surely be to impose some kind of extra levy on the retail banks that will then have to pass it on to their depositors.

Unlikely, you say? Just ask private pension holders, from whom €2.47bn was levied over the course of five years after the financial crash to help pay for the VAT reduction for the hospitality industry. It convinced the Minister back in 2010 that it had disproportionately suffered. Sound familiar?

Financial advisers are adamant that keeping so much cash on hand is a very poor alternative for longer term investors in particular, no matter how volatile (or irrational) the stock markets appear.

That said, the only really good value investment vehicle are private pensions which are not subject to the aggressive taxation that applies to so many popular non-pension investment portfolios that a) mainly use after taxed income, b) include the standard 1% levy, carry an eight year ‘deemed disposal’ tax of 41% on gains and a 41% exit tax on gains (that can be offset against any tax paid at eight year intervals). Instead, pension fund contributions attract a highest rate tax deductions, grow tax free and at retirement, the retiree can claim 1.5 times the value of their final salary, or 25% of the fund entirely tax free.

If all goes well, the Great Release - as the end of the pandemic may become known - will be a joyful experience for those who didn’t permanently lose our jobs and kept our homes.

Enjoy it…but start keeping an eye on the financial weathervanes.

Letters to jill@jillkerby.ie The TAB Guide to Money Pensions & Tax 2021 is in all good bookstores.

See www.tab.ie for ebook edition

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