The interest rate isn't the only thing that matters when choosing a savings plan. Here’s what else to weigh up before squirrelling your money away.
Choosing where to save your money might seem simple. Just pick the account with the highest interest rate, right?
But in reality, the “best” savings plan depends on a few other important factors like how much risk you’re willing to take, how quickly you might need access to your money, whether there are any limits on how much you can save, and what conditions are attached to the plan.
With this in mind, here are six key things to consider before you commit to a savings plan.
Your attitude to risk
One of the key things to consider when choosing a savings plan is your attitude to risk.
If you have a more relaxed attitude to risk, and are looking to save for at least five years or more, then saving into a managed fund could be a better option for your money.
Managed funds are offered through life insurance companies such as Irish Life, Aviva, and Zurich. You buy units in a fund which in turn invests in a range of stocks, bonds, commodities and even commercial property. And over the longer term, they can provide you with a higher rate of return on your money.
But investing, even over the longer term, can still be risky. And stocks and property can obviously go down as well as up in price.
So if you don’t like taking on any risk, and want a guaranteed return on your money, then choosing a fixed-term deposit account with a bank might suit you better.
How easy it is to access your money
Once you’ve thought about how much risk you’re comfortable taking, it’s also important to think about how quickly you might need your money.
There are three main types of savings accounts: instant-access accounts, which provide almost immediate access to your money, notice accounts, where you have a give a specific notice period before getting your money, and fixed-term accounts.
If you invest in a fixed-term deposit account, you generally won’t be able to access your money until the end of the fixed-rate period. So if you sign up to a five-year fixed rate, for example, you generally won’t have access to your money for five years.
Ask yourself whether this would work for you — and how you’d handle an emergency if you couldn’t access your funds.
On the flip side, an instant-access account is obviously much more flexible with easy access to your money. However these accounts will generally pay a lower rate of interest. Banks pay a premium for knowing how long they have your money for, so if you want quick and easy access to your money then you won't get the best rates.
Some fixed deposit accounts do allow you to access your money early, or at least a portion of it, meaning you don’t have to wait until the end of the fixed term. But there may be a penalty for doing this. For example, Bank of Ireland's Advantage fixed-term account allows you to access up to 25% of your money without any charge.
If you invest in a managed fund, you can generally access your money when you want to. But you'll need to complete an “encashment” request form first, post it back to your provider, and then it will usually take a few more days for the money to reach your account. With some managed funds, there will also be an early exit charge if you look to access your money within the first five years.
Whether the interest rate expires
Be wary of accounts with generous-looking headline interest rates.
Sometimes the advertised interest rate may only last for a few months or up to a year. After that, your money may attract a much lower rate of return.
So read the fine print carefully to see how long the interest rate lasts and whether it expires after a set period.
For example, you can save a maximum of €1,000 a month for 12 months with AIB's online regular saver at a rate of 3% — but this falls to just 0.25% after the year is up.
In some cases, it may be better to choose an account with a slightly lower rate of interest which lasts for a longer period. Otherwise, you may regularly have to move your money around and open new accounts in order to get the best rate.
The limits on how much you can save
Some accounts will have a minimum — but more importantly a maximum — amount that you can save.
After you have reached the maximum amount, your savings may attract a much lower rate of interest.
Some savings accounts aimed at children offer very competitive rates but only allow you to save between €1,000 and €5,000 in total for example. After this, you'll usually earn a negligible amount of interest.
The catches
Some savings accounts may only be available to people who are already customers with a bank.
And sometimes, to get the best interest rate, you may have to have a specific type of current account.
The online banks like N26 and Revolut reserve their best rates for those with one of their premium or top-tier current accounts for example.
If you have a large sum of money to save each month, it can sometimes be better to pay the monthly fee for the premium current account and therefore avail of the better interest rate on your savings.
The Bank of Ireland MortgageSaver is a savings account specifically designed to help first-time buyers save for a deposit. It offers first-time buyers €2,000 bonus interest (less Deposit Interest Retention Tax (DIRT)) on their savings. But to get the bonus you must save for at least six months and then draw down a Bank of Ireland mortgage within 30 months.
The level of tax and how to pay it
If you invest in a managed fund you'll pay tax at a rate of 38% (down from 41% previously).
Save in a deposit account with an Irish bank and you'll pay DIRT at 33%.
In both cases tax will be deducted at source by your bank or insurance company so you'll have nothing to worry about from a tax or Revenue point of view.
But if you want to save with a non-Irish bank or through a savings platform like Raisin, you'll have a bit of paperwork to do.
In this case your returns will be paid out tax-free. So you'll need to declare any interest you get for DIRT purposes on your annual tax return in Ireland. Though this is simple enough and can all be done online. But if you don't want the extra hassle, you might prefer to stick with an Irish bank.
Some banks in other countries might also charge a withholding tax to non-residents, so this is something to clarify before signing up. However in most cases the withholding tax can be reduced or avoided altogether if you fill in a residency declaration which your provider will send to you.
Compare your options
The right savings plan for you will depend on your goals, time frame, and comfort with risk.
So take a little time to compare your options carefully — and don’t be swayed by headline rates alone.
With the right plan in place, your money can work harder for you while still giving you the flexibility and peace of mind you need.
At bonkers.ie, our free savings account comparison tool makes it easy to compare interest rates from all the main providers and quickly find out where you’ll get the best return for your money.
