bonkers.ie Looks Closer: Alternative savings options
In this episode of the bonkers.ie Looks Closer podcast series we chat to Daragh Cassidy, Head of Communications at bonkers.ie, to discuss some alternative savings options.
With a record €127bn on deposit in banks and financial institutions, many people are looking for a home for their savings. However, with interest rates at an all time low, the traditional savings environment now offers little to no reward. So, what other options are there for your hard-earned cash? We take a look.
Here are the main points outlined by Daragh and Rob in the podcast.
Should people consider opening a savings account?
It depends what your objective is, but certainly the rate of interest that you’re going to get on a regular savings account is absolute pittance at the moment. Interest rates for savings accounts are at an all-time low.
You might get 0.5%, which is really nothing. If you’re looking for your money to work a little bit harder and you have a savings goal, you really do want that money to grow.
Having said that though, people should still be saving. Usually, experts say that you should have savings of about 3-6 months of your net disposable income.
For example, your monthly income is €3,000, you should have about €10,000 in the bank at a minimum that you can access easily to save for an emergency or rainy day. That should be everyone’s first financial goal and priority.
Once you’ve gone beyond that amount, then maybe look for other ways to save and invest.
Should people consider hiring a financial planner?
Financial advice is always really important, particularly if you have a lot of money that you want to save. You work hard for your money and get taxed on a lot of it, so when you have it, you want it to work as hard for you.
If you have €10,000-30,000 that you’ve saved up over the past few years, then it makes sense to get good financial advice so that you don’t lose that money.
Even if you’re taking out a normal regular savings account product, where you’re just putting in €100-200 a month, it does pay to get good advice. This can be advice from a bank, or from doing your own research.
Sometimes you do have to pay for it, although Irish people sometimes seem to have an aversion to paying for financial advice.
What would interest rates have to be in order to see a worthwhile return on savings?
There are a few things to consider here. We talk about the gross return and the net return, but we also need to take into account inflation, which people often forget.
At the moment in Ireland, inflation has been quite muted. While recording this, inflation is at around 0% but usually, inflation in Ireland is at 1-2%. You want your savings account to be matching inflation so the real return isn’t going into zero.
You also need to remember that you’ll be charged DIRT tax. This is Deposit Interest Retention Tax, which is currently 33% on any gains that you make.
When you take DIRT into account, inflation could also be eating into it. Really you’d want your savings account to be returning 2-3% a year for it to actually be growing in real terms.
What does the future look like for savings accounts?
Interest rates likely won’t go up for a long time.
We’re really in a low-inflation environment and low-interest rate environment. It’s not a good market for savers. It could be years or decades before we see interest rates go up.
Should you pay off any outstanding debts before trying to make money on savings?
It’s advisable to look at your debt and see if you can use your savings to pay it off.
It’s a mistake that a lot of Irish people make. They have debt on a credit card, maybe €2,000-3,000, which is costing them 20% interest and yet they have €5,000-10,000 in savings that isn’t earning them anything.
If you have any excess savings, definitely consider paying off your debt, particularly high-interest rate debt. For example, things like overdrafts, credit cards, hire purchase agreements, personal loans, etc.
What exactly are managed funds?
It’s basically a policy that’s sold by life insurance companies, such as Aviva, Irish Life, Zurich, etc. It’s a policy that will invest in a mix of assets, such as stocks and shares, bonds, and commodities, such as coal, oil and gas.
Because you’re exposed to financial markets, there’s a far higher potential to earn bigger returns.
Of course, what goes up must come down. The stock market can fluctuate on a regular basis. If you have a long term savings goal in mind, investing in a managed fund will give you the potential for far higher returns.
It’s important to note that managed funds can be for 5-10 years, so would be suitable for long-term saving.
What is the tax on a managed fund?
Make sure you get good financial advice so that you don’t end up investing in a product or fund that’s too risky for your needs.
Be mindful that taxes, charges and fees can really eat into the investment. With a regular savings account, the tax is DIRT and with a managed fund, you’re charged exit tax, which is 41%. This is only charged once every eight years, so your investment will grow.
Sometimes with these funds, you could be penalised or charged if you try to access your money within 5 years, so if you're looking for short term access to your money, this might not be the fund for you.
A financial advisor will go through all of this with you. They’ll do a fact find and a suitability statement. They’ll see what your goals are and will then recommend a product to you.
Exposure to more
Managed funds means that everyone is investing together and they give you exposure to things such as property. For example if you’re interested in the growth of commercial property, managed funds can give you exposure and access to that.
With these managed funds, there’s an app you can download and you can see on a regular basis how your fund is doing. If you want to switch funds, you can action that request through the app. Or if you want to access some of your money, you can start that online.
State savings products
With state savings products, you don’t pay DIRT. That’s what really sets these apart.
DIRT is quite high at the moment, but the rates on offer with a state savings product are still pretty measly unfortunately. No one is going to get rich quickly by investing in one of these.
With VAT, this reduces even further, so don’t expect a windfall.
The 10 year national solidarity bond offers a return of just under 1% interest a year, or 10% in total over the whole term. Meanwhile if you place your money in a five year savings certificate, you’d get 0.6% a year. It’s almost risk free but the interest rates are low.
You can access your money at any time, but obviously you’d miss out on future growth.
The greater the risk you’re willing to put in, the higher the return on investment. This is why people often need to have a good think about what their objective is.
Cryptocurrencies are really risky. This can’t be overemphasised enough, but if you have a few thousand euro spare and you’re willing to risk it, you could look into it.
Bitcoin is one of the most famous ones but there are about half a dozen other popular cryptocurrencies at the moment too.
The price of these has gone crazy in the past few years and some people have made an absolute fortune by investing in these. Some have lost an absolute fortune by investing in these as well.
Also at the moment with cryptocurrencies, you can’t really buy a lot of goods and services with them. You’re making money by buying at one price and selling at another.
Cryptocurrencies are easily accessible
A lot of younger professional, single people who would have savings are seen investing in cryptocurrency. Especially because they’re so accessible now on trading platforms like Revolut.
Make sure you do research and establish how quickly you can access this money. The price of Bitcoin is notoriously volatile.
It hit a high in mid-December of 2017 of $20,000 but fell to below $12,000. That’s an $8,000 drop within a few days. It’s been unpredictable ever since.
Saving for your pension
In retirement you’ll have a lot of rainy days and people will spend a lot in retirement. Putting money towards your pension is definitely something to consider.
At the moment, the State Pension age is 66, although that’s likely going to increase over the coming years to 68.
If you take the average life expectancy now to be 85-90 we could spend close to a third of our years in retirement, so saving for retirement is really important. Of course there’s no guarantee that the state pension is even going to be around in a few years or decades.
Pensions in Ireland are chronically underfunded. A state pension is around €13,000 a year and the average full time wage in Ireland is around €50,000. So to go from the average wage to €13,000 is a huge drop.
The reason you’ll want to set up a pension fund as opposed to a regular savings account is because it’s so much more tax efficient.
There’s tax-free growth in a pension. With a pension you might not be taxed anything for however long you have the pension going. You also get tax relief on contributions, which means you don’t get taxed on any income you then put into the pension.
What’s the process for topping up a pension?
The main thing is to chat to your employer. Every employer has to give you access to a pension scheme.
Employers don’t have to contribute to your pension but most will have their own group pension scheme, so chat to HR.
If they don’t have a scheme in place, they need to give you access to a Personal Retirement Savings Account, which is a pension product that allows you to move from job to job.
If you’re self-employed, get some financial advice or talk to Irish Life, Zurich, Aviva, etc. They all provide pension products and can give you some good advice.
If you wanted to top your pension up with a lump sum, would it be better to top it up in instalments or at once?
A pension top up is sometimes called Additional Voluntary Contributions, or AVC.
At the end of a tax year, you can make a lump sum contribution into a pension fund if you want. You’ll also get tax relief on it, so you’ll get a little bit back.
There are limits to how much you can invest in a pension and still get tax relief. The vast majority of people do not reach those limits.
We are underfunding our pensions, not overfunding them but keep in mind there’s a limit each year, depending on your age as to how much you can invest.
Adding regularly is probably the best thing you can do.
Retrofitting and going green for homeowners
There’s a lot of talk around climate change and we all know that we need to be doing our bit for the environment.
Houses in Ireland don’t tend to be the most energy efficient. One good way to use your savings is to look at making energy efficiency improvements around the home because it’s a win-win situation.
Not only will you reduce your carbon footprint, you’ll also help lower your heating bills. As we all know, heating is expensive in Ireland with our cold, damp climate.
People are probably familiar with BER ratings, which can go from A to G. Newer homes now have to have an energy rating of B3 or higher. Most people will be living in homes that are C, D, E or F.
Some retrofits don’t come cheap, but the Sustainable Energy Authority of Ireland (SEAI) does have grants available for putting in solar panels, heat pumps, etc.
Lots of the banks now also have ‘green loans’, which have reduced interest rates for people looking to make energy efficiency improvements.
Even if you only have a few thousand in savings, you could still make the improvements with the grants available or a personal loan.
The objective of retrofitting is to use less energy, save money on your bills and contribute to helping the environment, but retrofitting is also about making your home more comfortable.
Check out this blog which outlines finance options available for retrofitting to learn more or listen to our recent bonkers.ie podcast episode on everything you need to know about retrofitting your home.
You could also consider buying an electric car. They don’t come cheap and you’re looking at around 20-25k to buy one. You can really save on petrol and diesel overtime.
Specialised savings products
Unfortunately there aren’t quite so many specialised savings products. These are for when you have a specific savings goal in mind.
The main one is for children’s savings accounts. For example, AIB has a junior savings account, which is aimed at kids aged 7-11. This offers 1% interest. It’s not a huge amount but it’s better than half a percent.
EBS also has a children’s savings account, which offers 1%. The amount that you can invest in these is sometimes capped at €1,000-5,000 because it’s supposed to be aimed at savers.
A lot of people save for their children’s education. You could open one of these for your child and earn some money on the savings. You could always open one EBS one and an AIB one and add money to both.
If you’re looking to save for a house deposit, Bank of Ireland has a Mortgagesaver Account. This offers €2,000 bonus savings on your interest if you go on to draw down a Bank of Ireland mortgage.
Ulster bank has one as well, which is similar. It gives you a €2,000 bonus interest. Despite announcing its exit from the Irish market, Ulster Bank is still technically open to customers.
What would you consider to be the least risky alternative to a savings account?
The managed funds option is probably the safest alternative. Usually there’s a whole host of funds you can invest in.
A low-risk managed fund that has potential for a little bit of growth is a good idea. However they’re not good for those who are looking for short term access to money. There can be penalties for trying to access money within the first five years or so.
They offer some cool ways to save, such as Revolut’s vault feature, like an online coin jar.
If you have accumulated money in these apps, you should consider putting it somewhere else and earn at least half a percent.
Compare saving options
You can easily compare savings accounts and other banking products on bonkers.ie.
Use our savings account comparison service today to quickly compare the different account features and interest rates from all of Ireland’s providers. You could find the best return for your savings in just a few clicks!
If you’re looking for a new current account option, our current account comparison service easily compares different current account features and charges from all of Ireland’s main banks.