Banks and credit unions are sitting on a mountain of cash and it just seems to get bigger every month. The latest figures from the Central Bank show that there is now €126bn stashed away by householders.
hat is an extraordinary national nest egg, which averages out at around €34,000 per adult. And it doesn’t account for another €19bn in State Savings Schemes sold through An Post.
Of course, not all households have savings. The pandemic has wreaked havoc for thousands and thousands of people, leaving them out of work or having their wages subsidised by the State.
The national savings pot is skewed towards older people, those whose mortgages are paid off and those in secure jobs.
The surge in savings is despite interest rates paid on deposits being at rock-bottom levels. And any interest you do manage to make on your savings will be taxed at a punitive rate. The current DIRT (deposit interest retention tax) rate is 33pc. And interest rates could remain low for a while yet.
Daragh Cassidy of price comparison site Bonkers.ie says, “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 likely to remain at historic lows for years to come.”
Best rates
Cassidy says that it is not long ago that returns of around 2pc to 3pc were still possible for savers, but banks have slashed rates over the past while.
What this means is that the best rate a regular saver can hope for is around 0.55pc AER (annual equivalent rate), available from KBC Bank for its current-account customers. There will be DIRT tax of 33pc on any gains you make.
A rate of 0.85pc AER is on offer from Ulster Bank for amounts up to €15,000 through its Special Interest Deposit Account. The catch is that Ulster Bank is leaving the market.
Another option for savers is with the State Savings Scheme. Traditionally these schemes, which are sold through An Post, have offered some of the best rates, while most of the returns are tax-free. Add in the fact that these schemes are effectively State-guaranteed and it is not hard to see why money has always flowed into these products.
Earlier this year, the rates paid on State Savings Schemes were cut. The best rate on offer right now is 0.96pc in a 10-Year National Solidarity Bond. The return is tax-free to Irish residents. There are no fees, charges or commissions, and you get a fixed rate of return. There is a minimum investment of €50 up to a maximum €120,000 per individual, per issue.
Putting your money into the Five-Year Savings Certificates will give you a return of 0.59pc AER, or 3pc over the entire five-year term. You can get access to your initial investment and any interest earned with seven days’ notice. However, to benefit from the full return, you must hold the product to maturity.
Credit unions have also attracted a lot of savings and continue to do so. But most have now capped the amount members can save, such is the wall of cash in the system.
Some have set the cap as low as €10,000 in a bid to discourage a build-up of funds. Excess funds in a credit union that are not loaned out have to be put on deposit in banks. And banks are charging credit unions negative interest for holding their funds.
The high levels of funds in credit unions have been compounded by weak loan demand.
Inflation once again
Inflation is currently non-existent, at minus 0.4pc, but if it begins to creep back up, it will eat into the real return of your savings.
The European Central Bank has indicated that it is prepared to allow inflation to drift upwards, in a change in policy. Instead of tightening policy on higher inflation, the ECB may actually ease further to counter a recent rise in interest rates on bonds.
This threatens to ‘choke off’ growth by making borrowing more expensive. Founder of financial wellbeing provider MoneyWhizz and qualified financial adviser Frank Conway says we are not heading to the rates of inflation that were more common in the 1970s and 1980s. But if inflation heads up to 1pc, it could mean the real value of savings will fall every year.
“When you factor in the cost of DIRT tax on whatever rate of return you do receive on those savings, the real loss is even greater,” he says.
Have an emergency fund
Putting an emergency fund in place should be a priority. Ideally, this should be enough to cover your outgoings for six months.
After that is in place, consider what your short-term financial needs might be in the next few years.
A pension is an obvious place to put excess funds. Money put into a pension will attract tax relief of 40pc for those on the higher rate, provided that you do not breach the age-related tax-relief limits.
Investment options
Once an emergency fund is in place, and sufficient money is going into your pension, then investing might be an option. When it comes to investing, the range of options is pretty extensive, Conway says. For those who like keeping their money in a safe place, one option to explore is low-cost ETFs (Exchange Traded Funds) that can serve as a useful way of investing and include lots of diversification, while limiting the impact of fees.
You will need to talk to a financial adviser, although there are a growing number of do-it-yourself investment platforms that permit market access.
There is a multitude of other investment options in the market and any good financial adviser can direct you to the best choices.
Cassidy says that 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, might be a better option than a savings account. This is because it will provide the potential for far higher returns. You can usually contribute to one of these policies from as little as €100 a month.
“However, you’ll be crucified with taxes, fees and charges, so even here, getting a half-decent return can be tough, unless markets are highly in your favour.”
Expect to pay 41pc tax on any gains you make and 1pc of every amount that you save taken in the form of Stamp Duty by the Government, says Cassidy. You will also be charged a fund-management fee of between 1pc and 2pc 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 will 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, Cassidy notes.
As always, it’s important to take independent financial advice before investing any money.
