What is Loyalty Tax?
Firstly, Loyalty Tax has absolutely nothing to do with the ATO; it’s a far more underhanded way of extracting money from us.
Some of the most well-know and trusted companies in Australia apply a loyalty tax against their longest-term customers. Energy, mobile, broadband, mortgage, savings, credit cards and insurance providers increasingly punish us for our loyalty by quietly upping premiums as time goes by.
Put simply, service providers lure new customers with great deals for their initial sign up but once these plans or policies renew, or after a certain amount of time, the premiums increase. Sometimes they increase a lot.
If you stay on top of the sneaky loyalty taxes, you could save hundreds or thousands each year.
With insurance providers, specifically, these increases often continue over consecutive years. When insurance providers state the amounts on renewal notices, it rarely shows the previous year’s premium for comparison. Plus, the ‘You don’t have to do anything!’ statement for a policy to simply renew… that’s as far as many of us bother to read. Why wouldn’t we trust that nothing untoward is going on? After all, these are reputable, well known businesses we’re dealing with, right? How wrong we all can be.
Effectively, loyal client premium increases pay for the special deals offered to new clients. It’s a very lucrative cycle for providers, until – or unless – we catch them out.
Although most of us put in the hard yards of shopping around for the best deal before we choose an insurance policy, our lethargic approach to ongoing diligence is costing many of us a small fortune in Loyalty Tax, year after year.
Not just insurance providers
Although the insurance sector has been under the most scrutiny over this practice, a growing number of other service providers also rely on the fact that many of us are ‘set and forget’ people.
Commonly, we find changing providers a time consuming chore or simply too confusing. Plus, it can be hard to keep track of when a plan or subscription rolls over into a new one. Unfortunately, as long as the services, subscriptions and plans we have in place provide us with what we need, it’s far easier to simply forget about them. The reason why Loyalty Tax is also referred to as the Lazy Tax!
What is the solution for Loyalty Tax?
NSW Emergency Services Levy Insurance Monitor Allan Fels suggests that over 10 million Australian households were affected by insurance related Loyalty Tax. At a cost to policyholders of around $3.6 billion.
Although the rest of the country may need to wait until 2021 for it to become law across Australia, from July 1 2019, a change in legislation in New South Wales means that insurance companies must state the previous year’s premium on all renewal notices. The aim is to help clients be more aware when their provider applies a big increase, and see what that increase is.
Well publicised in the insurance sector, Loyalty Tax is widespread
For a large majority of us, it can be hard to keep track of when a plan or subscription rolls over into a new one and although we like to think our suppliers are giving us their best deal, they rarely are. This tactic has become more publicised in recent years with calls for Governments to act. But for the moment, its down to us, the consumers, to talk with our feet and pull providers back into line.
Anybody who is loyal to their provider and doesn’t shop around is likely to be gouged.”
Consumer Action Law Centre CEO, Gerard Brody
What can you do about it?
The best thing to do is give your finances a health check up.
- Check all your current plans, policies, mortgages, credit cards and subscriptions to see if they have changed. Look closely at your energy bills and compare to rates advertised online. Do the same with savings and mortgages. It takes just minutes.
- After that, make a note of what they now offer to new clients then check out a few competitor deals for new clients.
- Contact your providers and tell them you’re paying too much. If they don’t give you a decent offer, go elsewhere.
- Do the same thing every year or at the end of any plan, subscription etc. Set up reminders in your calendar to just put aside an hour or two to save yourself some money. It’s well worth it in the end.
How to reel in Loyalty Tax – Examples
Power Down
A work colleague contacted her energy provider (a very well-know company) after feeling that her bills were increasing far too much. “I just wanted to check I was still on the best plan and all my discounts were still in place,” she told me.
The news was bad! Not only was she on an expensive plan, but also only one of the discounts she had been promised was ever put in place. The result was a transfer to the better plan and the missing discount back dated two years. A bottom line saving of around 18% per quarter and hundreds refunded.
On the home front
At the end of a fixed-term interest-only mortgage on their investment property it was time to find a new loan. A colleague called around to find a good deal for the investment property. Various figures came back, all a better deal than she was currently getting from her existing bank. However, before switching, she contacted to her own bank to see what they would offer. The next day she signed new contracts with her own bank. Result: Cheaper rates for her investment property AND her home loan as well!
Final tips to stop paying loyalty tax:
- To get a better plan or rate, usually all it takes is to phone them and ask. “So hopefully I won’t need to change providers.”
- Be polite and friendly! Even if you feel ripped off, remember the person on the phone isn’t to blame. Be nice, explain what outcome you want, and you’ll more often get a constructive response.
One more money saving tip:
If any of your plans or subscriptions are work related, in their entirety or in part, make sure you keep records and claim the eligible portion on you annual tax return.
