John Hearne speaks to financial experts about how to get value from any money you set aside, given that value is gone from the savings market.
Value has disappeared completely from the savings market. If you've got a lump-sum you want to put on deposit for a-year, inflation will eat up the measly return, plus a small piece of your capital before the year is out.
Simon Moynihan of price comparison site Bonkers.ie has had a ring side seat for the steady decline of interest rates in the Irish market.
“Right now in Ireland, rates are all less than 1% unless they're loyalty rates—if you already are an existing customer or you already have a current account. They are the only exceptions."
Currently, you can get 0.9% AER on a one-year fixed rate deposit from KBC. The next closest rate for an equivalent account is 0.8% from Nationwide UK (Ireland). 0-45% is the best bank of Ireland can do. And all of these rates are net of deposit interest retention tax, or DIRT, which currently stands at 41%.
Factor that into the KBC rate and the best-rate in the market falls to 0.37%. The Bank of Ireland rate becomes 0.18%. According to the European Central Bank's current projections, inflation in the Eurozone is expected to hit 0.7% this year. This means that if you seek out the best one year term deposit in the country-from KBC-and net yourself a return of 0.37%, inflation will not alone wipeout that gain, it will also eat into the spending power of your lump sum.
Moreover, the ECB believes inflation is going in one-direction only in the years ahead. The bank is predicting an inflation rate of 1.4% next year and 1.6% in 2018.
“Unfortunately," says Simon of Bonkers.ie,"you're in a very poor savings environment at the moment, and without someone else coming into the market place and offering something worthwhile, or the government reducing DIRT, that's not going to change."
He points out that back in 2002, DIRT was only 20%. As recently as 2009, it was 23%. Now at 41%, it's more than doubled in the space of 13 years.
“It's a substantial burden on people," says Moynihan, "and Irish people do have a lot of money in cash savings. And as DIRT has doubled, interest rates have halved, so as savers have been hit, the government never got the wind fall it had envisaged."
Interest rates are falling and DIRT is rising simply be cause both the government and the ECB want us to stop saving. They want us to get out there and spend. Because until consumer spending begins to pickup, there's not going to be any broadening of the recovery.
Irish people have always been good savers—our savings ratios are among the highest in Europe. Currently, we have no less than €57,000 on deposit for every household in the state.
"That" says Simon Moynihan, "translates to a staggering €20,400 on deposit in Irish banks for every man, woman and child in the country. And if you just look at people aged 25 and older, there is around €31,000 for every adult man and adult woman in Ireland, a staggering amount given the trauma of the last few years."
Despite the fact that the return on-savings has seen declining steadily over the last few years, we've actually increased the amount we keep on deposit. Since 2009, that figure has never gone below €90 billion. We're now approaching the highest level of deposits held with Irish banks since January 2011. €94741 billion-and that's just private households, That figure increased by €3 billion last year alone.
Reasons for this jump in savings aren't hard to find. We need to save for the reasons we've always needed to save-for education, for a rainy day, for a deposit for a house.
The latter is of course the big one,
Last year's Central Bank rule changes have significantly increased the levels of savings home buyers have to bring to the transaction. Under the new rules, as long as the value of the house is below €220,000. first time buyers have to come up with a 10% deposit. But for every euro the price exceeds that threshold, they're going to have to find 20% of value.
Take a house which costs €330,000. You'll need total savings of €44,000 (10% of €220,000 plus 20% of the remaining €110,000) before the bank will entertain your application. The other strange thing about the Irish and savings is that, as Moynihan points out, two-thirds of the money we have on deposit is in what are called "overnight accounts".
“This is the kind of account where you can withdraw your money whenever you want, so no notice, no restrictions and no terms. There are just two types of account that fall into this category-demand accounts and current accounts. So an awful lot of people save in current accounts, and if you take a look at that money, it's either earning nothing or it's being charged fees."
One option worth investigating is Raisin.com—an online banking platform recently launched in Ireland which gives Irish savers access to European banking products. Through this intermediary, it's possible, for example, to access a one year term deposit account offered by Alior Bank in Poland which offers a rate of 1.6% - before DIRT.
Another option relates to bank fees. If you're paying out €20 a quarter in charges because you can't maintain the minimum €2,500 in your account to qualify for free banking, consider lodging your savings, or a part of them, direct to your current account. If they're currently languishing in a low interest deposit account with the same bank, you might actually be better off using them to qualify for free fees.
Note too that if you have outstanding loans, paying money into a savings account may be the wrong thing to do. The Competition and Consumer Protection Commission offers this powerful example: Suppose you have a €10,000 loan over four-years, at an interest rate of 10.1%. If you paid an extra €100 a month from the start of the sixth month, you would save €583 in interest and clear your loan 13 months quicker.
By comparison, if you put that €100 per month on deposit, you would earn just 37c over a 12-month period, based on KBC's aforementioned term deposit account, net of DIRT. Because credit card and consumer-finance debt tends to be expensive, you're usually better to pay off the loan instead of save the money at a lower rate of interest. For more detail on the different products that are out there, check out bonkers.ie.