I like the tax-free savings account: It’s about time

The tax-free savings account unveiled in the budget this week is a wonderful gift for savers, a much-needed option for those already saving money in a tax-sheltered RRSP. Now you can hedge your bets and not have to worry about high taxable withdrawals in retirement.

About five years ago, I started writing columns about how RRSPs weren’t suitable for people living at a subsistence level. They might have put away money when they were young, thinking this would help them in later life, only to find that their RRSP income pushed them into a higher tax bracket and robbed them of some mean-tested benefits.

My thinking was informed by Richard Shillington, an Ottawa-based policy wonk who spent some time as a resident academic at St. Christopher House in Toronto. He talked to older clients of the social agency and found many weren’t getting the government benefits, such as the guaranteed income supplement, they were entitled to because they didn’t know about them. He also noticed the destructive impact of their RRSP savings.

He wrote a couple of papers for the C.D. Howe Institute, calling RRSPs a fraud on the poor — strong language for the venerable think tank. He urged Ottawa to tackle the perversity of the current system’s administrative rules, setting up something like the Roth IRA in the United States. If not, the financial services industry should run an educational campaign telling low-income Canadians not to buy RRSPs.

Only slowly and with difficulty is the word seeping out that that RRSPs are a poor savings vehicle for the GIS-destined. That RRSPs are a poor investment vehicle runs contrary to the monolithic financial advice that they are good for everyone. The small voice warning low-income Canadians must fight the advertising onslaught each January and February in RRSP-selling season.

The previous Liberal government warmed to the tax-free savings account. But despite encouraging words in each budget, they never did anything but study it. Much as I dislike Stephen Harper and Jim Flaherty, I have to admire their willingness to shake up the tax system in Canada and allow another option for savers.

The thing about life is that it’s so unpredictable. You never know where you’ll end up. You’re riding high today and then you you lose your job, get sick, have an accident or find yourself being an unpaid caregiver for a family member. Suddenly you’re going to food banks and lining up at the welfare office. You need financial resilience to bounce back from adversity.

Despite all the scary statistics about debt levels, many Canadians do put away money for the future. But their savings efforts should be rewarded, not punished by taxes and clawbacks that confiscate much of what they have set aside.

I often talk to middle-class people who regret their decision to save in RRSPs. They didn’t realize the taxes would be so high and the withdrawal rates so inflexible. Now they have a savings vehicle that won’t give them a tax deduction on the way in, but won’t penalize them on the way out. It never hurts to have more choices.

The Roth IRA is a popular feature of the U.S. tax and savings regime because it’s so useful, especially for young people. If you put pretax money into a savings plan at age 20 and leave it in until age 71 when you have to begin withdrawals, “you have been growing taxes for Uncle Sam for 50 years,” says a proponent.

So, let’s enjoy our $5,000 of tax-free savings in 2009 and wait for successive governments to increase the limits, as I’m sure they will (just as they did for RRSPs). This is one budget gift that will keep on giving.

Got a complaint? Set up a Facebook group

My two sons have been on Facebook for ages, but they said parents weren’t welcome there. So I stayed away. But now I have a Facebook profile and 23 friends.

“Welcome to Facebook where our generation is still rather thin on the ground,” Ottawa mystery writer Barbara Fradkin, a high school friend, wrote on my wall.

So, why do I need to be there? It’s hard enough keeping my blog updated, let alone writing daily status reports on Facebook, as some people do. But since I’m teaching a financial basics course at George Brown College for young people age 20 to 35, I thought I’d set up a Facebook group.

Still haven’t set up my own group yet (I’m waiting for my son to show me how), but I’ve been exploring other groups and noticing how many were trashing big corporations. I’ve already joined Air Canada Blows at the request of a reader who sent the following request:

Right now there are several groups on Facebook dedicated to issues with Air Canada.

1. Air Canada Blows (Hamilton / Toronto based) – 72 members;
2. Air Canada Blows (Calgary based) – 232 members;
3. I Hate Air Canada – 70 members;
4. I would rather walk than fly Air Canada – 1,720 members; and
5. Air Canada screws me – 1,004 members

If I can get them to consolidate, the total membership would be 3,000+. Could that be a story? Or is there a story in the fact there are so many groups & people who are frustrated with Air Canada?

Do other companies also have enemies congregating behind a wall on Facebook, safe from Google searches? I started checking and found groups of dissatisfied customers of the usual suspects — Bell, Rogers, Premier Fitness, Bloomex, ICICI Bank and Indian call centres in general.

Some anti-corporate groups are set up by former employees with their own beefs. That makes sense because Facebook kids often work in customer service jobs while going to college or university. I look forward to reading what they have to say.

But there are fan groups, too. Starbucks Addicts, Toronto, has 967 members. The Tim Hortons Coffee is Like Crack to Me Group in Toronto has 284 members. Lululemon Lovers, a global group, has 4,689 members. And there’s also I Love Girls Who Wear Lululemon (2,814 members).

Calling all Facebook members. Tell me about your favourite groups, especially those where you trade horror stories about corporate arrogance. Will these forums become a force of change? Are companies listening to the conversations? If you bitch about a firm and later apply for a job there, could your Facebook rantings come back to haunt you?

How can they treat customers that way? Part Three

This is a catchall title for the interesting complaints that come my way that don’t fit into specific categories already on this blog.

What makes you mad? What letters have you sent to companies that never got a response?

It’s Valentine’s Day and I should be showering love and compliments around. But as a consumer advocate, I hear more tirades than tributes. They can’t all fit into the paper, but they can get an airing here.

Fitness club members spinning with rage

Most people tell me they want to get out of a fitness club contract. They think they’re signing up for one year, but keep getting payments charged to them in perpetuity.

But this week, I heard from a fitness club member who wants to get his contract back again. He was cut off for the crime of complaining too much about his club’s shoddy maintenance.

I’ll let Paul explain his case below. But I just want to say he’s one of several members of the Dunfield Club in Toronto, recently taken over by Extreme Fitness, who have written to me lately. Others are upset about the marketing campaign, which they think is misleading, and the overcrowding that results from excessive promotion of low-cost introductory rates.

Then, there’s always Premier Fitness and its attempts to keep collecting fees from people who assumed they had long finished with their memberships. That story never dies.

Anti-bank rivals offer interesting choices

ING Direct is known for high-interest savings accounts and low-interest mortgages. But it’s never made much of an impact with mutual funds, despite previous attempts to launch its own funds and distribute other funds.

So, ING has hopped onto the bandwagon of index funds and introduced its own version of the couch potato portfolio. The Streetwise Fund lets you bundle index funds together into a portfolio that suits you. The balanced fund, for example, is 40 per cent Canadian bonds, 20 per cent Canadian stocks, 20 per cent U.S. stocks and 20 per cent international stocks.

You can almost hear the conspiratorial whisper when you read ING’s advertising slogan, “the mutual fund ‘they’ don’t want you to know about.” You read about the high cost of everyone else’s actively managed funds, but you don’t see any reference to the cost of the passively managed Streetwise Fund.

Only when you read the 32-page prospectus do you find the MER is 1 per cent a year. That covers 0.8 per cent management fees and 0.2 per cent operating expenses. If you’re familiar with index funds, you’ll realize this is more expensive than other products.

I found a great discussion at the Financial Webring Forum. The conclusion seems to be it’s worth the cost if you’re a beginning investor who wants a no-hassle portfolio. Yes, you can bundle a few index funds together and pay about half of the Streetwise MER, but you have to keep track of them all and rebalance each year. As for exchange-traded funds, they’re definitely cheaper. But you have to pay trading commissions, which can really add up if you’re contributing a small amount each month.

So I think ING is on the right track with this product. But when the company says, “it’s about time you were given the straight goods when it comes to investing,” I wish its online promotion was more up front about disclosing and comparing costs.

Capital One is known for its “hands in your pocket” TV ads promoting credit cards. The latest Platinum MasterCard deserves attention. It’s billed as Canada’s lowest long term rate, not an introductory rate, at prime plus 0.9 per cent on purchases and balance transfers and no annual fee.

Canada’s prime rate is now 5.75 per cent, which makes the MasterCard rate 6.65 per cent. That’s definitely way below anything I’ve seen. The catch is that you need “excellent credit” to apply and be accepted.

So, what’s excellent credit? The U.S. spokeswoman said this:

You’ve had open credit such as a credit card, loan or line of credit for more than three years.

You’ve had no bankruptcies and no defaults on credit as a result of failing to pay debts back to creditors.

You have not been declined for credit more than once in the last six months.

You’ve made all your payments on your existing credit on time in the past six months.

The low rate never runs out, but you only get to keep it if you’re a prompt payer. You may find your rate bumped up to double-digit range if you’re more than 10 days late twice within a six-month period. However, you can have your prime plus 0.9 per cent rate restored if you pay on time for nine months in a row after you slip.

Monty Loree, who offers the new Capital One card at his Canadian Money Advisor blog, gave me a rundown of the best rates on credit cards in Canada.

MBNA Platinum at 14.99% – No Annual Fee

Scotia Value Visa – Fully secured 9.40% – (This card is secured against assets) – $29 Annual Fee

Scotia Value Visa – Non-secured 11.40% – $29 Annual Fee

TD Emerald – Prime+1.9% – Prime +6.9% – $25 annual fee

CIBC Select Visa 11.5% – $29 Annual Fee

National Bank of Canada – Prime +4% – $35 Annual Fee

CitiBank Silver Low Fee Card – 9.9% interest – $29 annual fee
(I called into customer service to get their lowest interest rate card.)

As a rule, to get the lower interest rates, you’re either going to need a very good credit score with Equifax and/or TransUnion or you’ll have to secure the credit card.

The American credit card companies that do business in Canada seem to be more aggressive with their rates.

It’s best to get the permanent low interest rate cards. The introductory rates are a hook to attract people. The companies are obviously interested in getting the customer to stick around and pay the higher interest rates.

I’m blown away by the response

I’ve been on the phone all week talking to people who regretted signing an energy contract. Normally, I get a handful of calls in response to a column. Most people send emails. But in this case, the calls outnumbered the emails by about five to one.

Since energy marketers use door-to-door sales as their preferred tactic, their customers tend to be seniors, stay-at-home parents and those who recently moved. Working outside the home, I’ve never had a salesperson ring my doorbell.

Yesteday, I spoke to three ladies aged 83 to 84 and one caregiver for a lady who’s 93. They’re all angry and confused. One customer thought she was already on a contract, but didn’t know which company she was with and which company got her to sign a new contract.

Of course, they’re finding the high costs hard to bear. Their electricity bills are often double what their neighbours are paying. I doubt anyone in Ontario has saved a penny on electricity by signing a contract since the market was deregulated by former Premier Mike Harris.

One caller had the impression, through all the ads and sales calls he received, that he HAD to sign a contract. There were no other options. He didn’t realize he could stay with his regulated gas utility until he was comparing bills with a neighbour and saw the much lower rate. I wonder how many others think that way.

I’m still sending complaints to each marketer to review. Senior executives often agree to let people out of their contracts without penalty once they see the details.

Universal Energy agreed to release Peter Leschyshyn from his electricity deal without demanding a $700+ termination fee. He had been lied to at the door by a saleswoman he invited into his home on a freezing cold night.

Here’s what this senior (turning 70 this year) said in his original hand-written letter:

I would like to a procedure put in place to keep away door-to-door soliciting, as too many people are disadvantaged by this practice. For example, automobile dealers don’t send their personnel to your house to sell automobiles.

The town of Orangeville owns Orangeville Hydro. That means we the citizens and taxpayers of Orangeville own the hydro. So why would I jeopardize my position to accept a deal from an unknown company and one that does not have a business based in this town?

Please, I’m pleading with you to do something positive for me and my family so I can look back at the year 2007 and get bck the Christmas spirit I lost. May we come to some solution to implement ways to make things better for seniors who worked hard to make this country one of the best in the world.

Please help me make some sense of this. I stay at home and mind my own business and now I find myself involved with an agency that’s bent on (for lack of a better term) pimping my bank account.

Does this sound familiar? His comment about companies that keep grabbing your funds without permission is a popular refrain at blog postings, such as Bell Blues and What is It With Fitness Clubs? This way of doing business shifts power from the payee to the payor. It must be stopped.