With a record €127 billion or so on deposit with banks and lending institutions in Ireland at the moment, many people are looking for a home for their savings. But with interest rates at rock-bottom levels, where can you put your money?
There’s really no two ways about it. With interest rates so low the environment for savers is extremely poor right now and will remain so for the foreseeable future as interest rates look like remaining at historic lows for years to come.
That doesn’t mean people shouldn’t still be saving though.
Whether it’s for a house deposit, a rainy day, or your child’s education, saving for the future is all part of prudent financial planning.
Here we take a look at some places for your money in today’s savings climate.
Invest in a managed fund
If you have a longer-term savings goal, then placing your money into a life assurance investment policy with the likes of Irish Life, Zurich or Aviva, which will invest in a mix of stocks, commodities, property and bonds, could be a good option as it will provide the potential for far higher returns.
You can usually contribute to one of these policies, often referred to as managed funds, from as little as €100 a month and your appetite towards risk will determine what type of fund your money is invested in. Alternatively you can invest a lump sum starting from around €10,000 or so.
Those with a lower risk appetite will usually be recommended to put their money into a fund that mainly invests in bonds and a small percentage of stocks, while those who are prepared to take more of a risk with their money can choose funds that invest mainly in stocks, property, and commodities like gold and oil.
However you'll be hit hard with taxes, fees and charges, so even here getting a half-decent return can be tough, unless markets are highly in your favour.
For example you'll pay 41% tax on any gains you make. This is because you'll be subject to life assurance exit tax and not DIRT. You'll have 1% of every amount that you save taken in the form of stamp duty by the Government, and you'll also be charged a fund management fee of between 1% and 2% a year on average.
You should also be aware that you won’t have instant access to your money. If you want to draw down some or all of your funds you’ll have to submit an encashment request which can sometimes take a few days to process.
And of course what goes up, can also go down. Depending on how markets perform, you may not get back your original investment.
Look at a State savings product
The main advantage of investing with the State is that you won’t have to pay DIRT (currently 33%) on any returns that you make.
However the rates on offer are pretty meagre and have recently been reduced even further so don’t expect a windfall!
The 10-year National Solidarity Bond on sale at the moment offers a return of 0.96% interest a year or 10% in total over the whole 10-year term.
Meanwhile placing your money in a five-year Savings Certificate will get you 0.59% a year or 3% over the entire five-year term.
With inflation currently negligible, your savings will at least be making a small return in 'real' or inflation-adjusted terms. And these returns are still better than anything you'd get with a bank right now, with the aforementioned bonus of not having to pay tax on your gains.
Also, you’re not tied into these products - you can exit them at any time by giving seven days’ notice; you won’t face a penalty for doing so, you’ll just miss out on future interest payments.
Pay down your debt
Everyone should have a rainy day fund of at least three to six months of their net disposable income.
However, once you have this saved, you’re usually better off using any savings you have to pay down your debts as the interest you’ll be charged on any loans will usually be far higher than anything you’ll earn on your savings.
Paying 20% interest on a €2,000 credit card debt makes little sense, for example, if you also have €2,000 in savings that is only earning you 1% interest and which could be used to fully clear your card balance.
Having a large amount of debt while also having a large amount of savings is a mistake Irish people in particular seem to make, so don't be one of them.
Invest in cryptocurrency
Cryptocurrencies have been slowly gaining in popularity since Bitcoin was first created in 2009.
A cryptocurrency is a type of digital or virtual currency, which means it exists purely in electronic form. A digital currency is not a tangible currency like the euro or the dollar are, as there are no physical notes or coins. It is accounted for and transferred using computers only. It is also secured by cryptography, hence the name, which makes it nearly impossible to counterfeit or double-spend.
Bitcoin is the most popular and well known cryptocurrency, though there are many others, and it continues to trade close to its all-time high with its price now around €28,000/$34,000 - up about 77% over the past month and 305% over the past year alone.
With returns like these you can see why so many people are interested.
However the price of Bitcoin is notoriously volatile and investing in it is only recommended for people who are prepared and willing to take a huge risk with their money.
For example the price of Bitcoin hit a previous high of $19,850 in mid-December 2017, but then fell rapidly to below $12,000 within days. Its value has shifted unpredictably ever since, with frequent large drops followed by rapid recoveries. Its value then went through the roof leading up to its debut on the Nasdaq exchange in mid April, hitting over $62,000.
And as you are investing in something virtual, and not something tangible like property, gold, or stocks that are tied to a real company, Bitcoin could quite easily be replaced with another digital currency and then fall out of favour with investors and plummet in price again.
Bitcoin also isn’t legal tender though a small, but increasing number, of online retailers accept it as a payment method.
There are lots of online exchanges where you can buy and trade Bitcoin while Revolut customers can buy, hold and sell Bitcoin and a few other cryptocurrencies at the touch of a few buttons in the Revolut app. However Revolut customers can't actually use their bitcoins to buy anything - the money you make is by speculating on its price and selling it at a higher price than you buy it for.
Bitcoin can also be purchased fractionally, so you don’t need to buy a full Bitcoin to own some. For example, if Bitcoin’s price is $10,000, you can purchase 0.01 Bitcoin for $100.
Treat your current account like a savings account
Although banks have made it far trickier to avoid current account fees in recent months, there are still some ways to reduce the costs of managing your account, one of which is to use your savings to avoid fees.
For example, customers of Ulster Bank who keep €3,000 on deposit in their account at all times can avoid most day-to-day fees.
For example if you make 1 contactless transaction a day, and 5 ATM withdrawals, 5 chip and pin payments, and 15 direct debits and/or standing orders and/or lodgements per month, this would reduce your fees from just over €8 a month to just €2. A saving of over €72 a year.
Taking DIRT into account, your €3,000 would need to be earning a rate of over 3% AER to match this - something no bank is offering.
Looks at a specialised savings account
If you have a specific savings goal in mind you may be able to get a slightly better interest rate. For example, AIB’s Junior Saver account, aimed at kids from 7-11, is offering 1% interest a year on amounts up to €1,000.
The EBS Children's Savings Account also offers 1%.
Both rates are paltry but still higher than what you could earn with a standard savings account.
And if you’re saving for a house deposit, check out Bank of Ireland's MortgageSaver account, which offers €2,000 bonus interest on your savings if you then draw down a Bank of Ireland mortgage.
Top up your pension
If you have any excess savings that need a good home, then a pension is no better place.
Most experts recommend that you need a pension of at least half your pre-retirement income in order to live comfortably in your golden years. But two-thirds is best.
The average full-time wage in Ireland is around €48,000 - this means you'd need an income of at least €24,000 in retirement, if not more.
The current State pension is just under €13,000 a year, which means most workers can expect to experience a significant drop in their living standards unless they make their own provisions for their retirement years. Plus there's no guarantee that the State pension will even be around in a few decades' time as it becomes increasingly unaffordable due to an ageing population.
Central Statistics Office statistician James Hegarty recently warned the government-appointed Pensions Commission about this ticking pensions time bomb when he outlined how there are currently five working age people to every one person over the age of 65. However by the year 2051 this will fall to just 2.3 people for every one person over 65.
In short, people need to start making their own plans for retirement.
The good news is that saving into a pension is one of the most tax-efficient things you can do with your money. You won't pay any tax on your contributions (up to certain limits) while your savings will grow tax-free. You can also draw down a tax-free lump sum of 25% of your pension pot upon retirement.
So rather than keep your money in a low-yielding savings account for a rainy day - look at investing it in a private pension - as you can be sure there'll be a few rainy days in your retirement years too.
If you're already saving into your own pension through your employer you can easily make a lump sum 'top-up' or what's called an additional voluntary contribution (AVC). Speak to your employer or else chat to a qualified financial advisor.
Retrofit and go green
Sometimes you gotta spend a penny to make a penny as they say. And with climate change an ever pressing issue, spending some of your savings on making your home more energy efficient is a real win-win as it'll help reduce your energy and heating bills in the future while also lowering your carbon footprint.
Retrofitting isn't necessarily always cheap of course and the cost may be beyond what you have in savings. However the SEAI offers a range of grants to contribute towards a host of upgrades while lenders such as AIB and An Post now provide reduced interest rate 'green' loans.