With interest rates so low it’s not the best time to be a saver but spreading your cash could optimise returns
It’s not the best time to be a saver. If, two years ago, Irish banks were willing to pay a premium for deposits to lower their loan-to-deposit ratios, a recovery of sorts means that those days are largely gone, while European rates remain on a downward trajectory, as evidenced by the latest decision from the European Central Bank.
But despite this, for many consumers security of capital is still more important than return, which is why so many still favour deposit accounts as a home for their money.
However, even if savers are wary of the stock market, they could still bring a little investment nous to how they structure their savings, and consider a portfolio approach to ensuring they get a spread across the various deposit account on offer.
The savings environment
The ECB may have introduced negative rates for lenders for the first time, but savers shouldn’t be alarmed.
“It’s important to remember that it’s for banks depositing at the ECB. It’s a way in which the ECB will try and incentivise banks to put money to work elsewhere or deposit in the inter-bank market. I don’t think we’ll get to the stage where we’ll see negative interest rates for savers,” says Dermot O’Leary, chief economist with Goodbody Stockbrokers.
What the move does mean is that with the ECB’s key rate now cut from 0.25 per cent to 0.15 per cent, there is “still further scope for Irish banks to bring down term deposit interest rates”.
“It will give banks further reason to go ahead and do that,” suggests O’Leary, adding he doesn’t expect rates to go up until Q4 2016 “and could be in to 2017”.
And it’s not just the ECB that’s disincentivising savers. Last October, the Minister for Finance raised the rate of DIRT to 41 per cent, and imposed PRSI at 4 per cent on those earning more than €3,174 in interest on their savings.
In addition, Irish banks are no longer willing to pay over the odds for deposits to boost their balance sheets. As O’Leary notes, AIB now has a 100 per cent loan-to-deposit ratio which means that it doesn’t have the same sort of pressure to raise deposit levels.
So for savers, low rates are likely here to stay for quite some time yet.
If you want to get the greatest return on your money, the best option is to typically lock away a lump sum for a fixed term. Remember, when comparing fixed-term bank accounts look for the AER or annual equivalent rate, as most providers will also give you the gross rate for the term – which may look more enticing but makes it difficult to compare like with like.
For example, if you were offered 3.39 per cent over 18 months, or 3.53 per cent over 24 months, which would you say is the better rate? It’s actually the former, with an AER of 2.25 per cent compared with 1.75 per cent for the latter.
the better rates? Permanent TSB offers 2.25 per cent on amounts from €5,000. So, if you put €50,000 into such an account you will have earned €2,190 (before DIRT) by the end of the term. It’s also an “interest first” account, which means you’ll get your interest within 30 days of opening the account.
Another option is KBC’s 12-month deposit account, which pays 2.05 per cent, so will give you a return of €1,025 on your money, while Ulster Bank pays 2.1 per cent on its six-month fixed term deposit.
If you fear negative interest rates, the longest product available runs for four years. KBC, Rabodirect, Ireland State Savings and EBS all offer savings accounts over this term. The best rate available is from EBS (2.06 per cent) and the worst is from Rabodirect (0.9 per cent). When you consider the impact of tax free savings, however, the 1.47 per cent rate from State savings also looks competitive.
You may incur penalties if you need to get access to your money early in a fixed rate account, so if this is a factor, you may – or may not – have to give up some of the return if you want to avoid penalties.
With EBS’s SureCertificate 48-month account for example, you’re allowed to make withdrawals on the six-month anniversary dates without incurring interest penalties. It pays a rate of 2.06 per cent.
It’s hard to find a reason for a notice account these days. Developed on the premise that if you give the bank a certain amount of warning – seven or 21 days for example – the idea is that you will earn a higher rate on your money. However, given the competitive rates that are now available on easy access accounts it seems pointless to enter into such an arrangement.
AIB for example pays just 0.3 per cent on its seven day notice account, or 0.75 per cent if you opt for its online option.
The highest rate you can earn on a notice account is 1.75 per cent, and is offered by both Nationwide UK and Rabodirect, based on giving notice of 30 days.
So if you want a better return, without locking your funds away it may be best to opt for an instant access account.
If you have significant funds languishing in your current account earning a negligible 0.1 per cent, it might be time to move them into an instant access account. You will still get immediate access to your rainy day funds without incurring a penalty, but you might just earn a little bit more.
For example, both KBC and Permanent TSB pay 2 per cent on their instant access accounts. So, based on a lump-sum of €15,000, you can expect to earn about €300 on such an account. KBC accepts between €3,000-€100,000 for its account, while PTSB applies no such limit. However, to get this rate from PTSB you must be a customer of the bank and registered for its online banking service.
A point to bear in mind is that thanks to the advent of banking fees, it may actually pay to keep a certain amount in your current account – depending on the rate you can earn elsewhere. For example, if you are a client of Bank of Ireland, you will need to keep €3,000 in your account at all times to avoid banking charges. While you will still have to pay a €20 annual maintenance fee, you will avoid day-to-day banking charges by doing so – which could realistically set you back about €200 a year. As a result, this could be equivalent to earning a rate of 2 per cent on savings of €10,000, so it may make sense to simply keep the money in your current account.
You may have your portfolio of savings in place, but this doesn’t mean that your savings are complete. Saving a fixed amount each month can help grow your savings, as well as cover any unexpected bills. And luckily for you, there are still good rates available in this category.
Top of the bunch is Nationwide, which is paying 4 per cent on amounts of up to €12,000 over a 15-month term (5.04 per cent gross). You can put away between €100 and €1,000 each month, and two withdrawals are allowed.
Another option is KBC, which pays 3.5 per cent on its regular saver account on monthly amounts of between €100 and €1,000.
Remember that when the term of a regular savings product ends, you may need to move the balance to ensure you continue to earn the best return. For example, if the balance of your account with Nationwide exceeds €15,265, the AER rate drops to 1.05 per cent and applies to the total balance in the account.
Getting tax efficient
Since the move to push the rate of DIRT up to 41 per cent in last year’s budget, State savings have become more attractive, as you don’t have to pay tax on the interest earned. While at first glance, rates on offer may appear low, when you factor in the tax saved, the differential isn’t as great.
Take the three-year savings bond. It pays a rate of 4 per cent – AER 1.32 per cent – over the term on amounts of between €50 and €120,000. Provided you’re an Irish resident, you can earn interest tax free. This means that if you lock away €100,000 in this product, at the end of three years you’ll have accumulated €4,037.
Compare this with a product which pays an AER of 2.2 per cent over the same term. At the end of its life you would have earned €6,816 – but tax at 41 per cent will take away about €2,800 from this, leaving you with about €4,000. So, in effect, you would have earned slightly more had you opted for the State savings product, despite the lower interest rate on offer.
Spreading the risk
While it’s not so much of a concern anymore, another benefit of taking a portfolio approach to your savings is that you can spread your risk between various institutions.
The Deposit Guarantee Scheme protects deposits of up to €100,000, guaranteeing to repay your funds within 20 days in the event that a bank, building society or credit union is declared insolvent. So, if you have €100,000 in one institution, and €100,000 in another, you will be protected in full. Remember, the State savings scheme sold through An Post is not part of the scheme, as all your money is protected by the Irish government.
Foreign institutions not covered by the scheme, such as Rabodirect and Nationwide UK, are covered by schemes in their respective home countries, but the total amount may differ. In the UK for example, savings of up to £85,000 (€104,578 ) are protected by the government.