There will always be good reasons for putting money away, but a decent return may no longer be one of them as banks continue to tighten the squeeze, says Charlie Weston.
It is not a good time to be a saver.
Interest rates offered to savers have been falling for four -- years until a mile stone was reached last month when the (European Central Bank) ECB cut its main interest rate to zero.
Then Irish banks followed suit by cutting the interest rates offered to savers with some deposit rates now approaching Zero too.
The result of these cuts, and successive previous interest rate cuts by the banks, is that there are now only a handful of accounts available to Irish savers that offer a return of 1.0pc and most accounts offering only a fraction of that.
RECORD LOW RETURNS
Record low interest rates coupled with a record high 41pc DIRT (deposit interest retention tax) rate mean that most savers are receiving negligible returns on their deposits.
Returns are so bad intact. that now a customer with €10,000 on deposit and earning a market leading 1.0pc interest rate will receive just coin interest after 12 months when DIRT has been deducted.
And unfortunately most savers are not earning top-rates with their banks, according to Simon Moynihan of price comparison site Bonkers.ie.
Inflation is increasing in Ireland now too, and it's expected to hit 0.6pc this summer, meaning that it will become very difficult to maintain the value of our deposits by keeping them in traditional deposit accounts.
Despite record-low interest rates and a 41pc rate of DIRT, Irish households are still saving as much now as they ever have and with a near record €95bn in household deposits with the banks, savers have shown that they are not deterred by poor returns and high savings taxes.
The banks have long known this too and have been inching down deposit rates for years -to a point now where the interest paid on demand accounts is 0.3pc or less from all of the Irish banks—with some offering as little as 0.01pc Mr Moynihan said.
These rock-bottom demand rates are particularly significant because two-thirds of our money is in demand accounts earning almost nothing in interest and providing the banks with vast amounts of capital at almost no cost, he said.
SO WHAT SHOULD SAVERS DO?
Security plays a significant role in how customers choose where to start a savings account or where to maintain their deposits, and security is frequently stated as the number one reason for choosing a bank.
Customers tend to go with familiar institutions because of the perceived security and then stay with them long-term.
And this has allowed banks to lower rates in unison without significant numbers of customers leaving, or money leaking to higher interest institutions. There shouldn't be an issue with moving deposits though, Mr Moynihan said.
The Deposit Guarantee Scheme protects deposits ineligible institutions up to €100,00 per person for money in banks, building societies and credit unions that are authorised by the central Bank of Ireland. And the scheme will issue compensation to depositors within 20days of an institution failing.
The Deposit Guarantee Scheme does not mean that customers should throw-caution to the wind and forgo security altogether. But it does mean that customers should feel more comfortable shopping for better rates and should consider other institutions as well as the big banks. Sadly, we are in a very poor savings environment right now, the Bonkers.ie expert said.
And there isn't much of an incentive to move banks based on interest rates alone.
However, it will only be through customer action that rates will improve. If one bank offers a market-leading rate and significant deposits move from low interest accounts to take advantage of it, other banks will respond in kind by offering better rates themselves. And it's the customers that can help pull themselves out of this poor rate environment.