It’s all been about mortgages and inflation so far, but rising interest rates have a good news side too: for depositors who for the first time in almost a decade may finally start to get a return on their money.
anks, quick to factor in the cost for loans, can be slower when it comes to rewarding savers, but the European Central Bank’s decision to raise interest rates to 3pc brings deposits out of the doldrums and retail banks like AIB and Bank of Ireland are finding they can no longer fail to pass on at least some of that to their beleaguered deposit account holders.
There is over €140bn in household deposits – excluding companies and corporations – with cash languishing in bank accounts, state savings products, An Post and credit union accounts.
While this is unevenly distributed – most families like having some savings put by, even while juggling debts at the same time – it amounts to around €30,000 per person. It has increased rapidly, especially during the spending freeze of Covid.
A huge €107.8bn is held as ‘overnight deposits’ with the ECB, which amounts to 25pc of our GDP – less than the EU area average of 31pc.
This is banks placing the cash ready for withdrawal if required.
Up to very recently, they were being charged to do so but didn’t pass along this fee to any but their wealthiest customers. Fearing a backlash on negative interest, they sucked it up instead, charging customers elsewhere to make up the cost.
Keeping cash liquid is a vital part of most people’s portfolio
Much of it is accounted for by pensioners with large lump sums which they are loathe to chance in risky investments, those saving for their first home and those who are worried about what rainy days are to come.
Keeping cash liquid is a vital part of most people’s portfolio. However, with inflation biting at 8.5pc, it is being eroded far faster than its buying power can be maintained.
So any return, even the fairly risible 1.5pc per annum – the maximum currently offered by a retail bank – is welcome.
What’s on offer?
Where you save can be less important than how you save. Banks offer better rates for people who don’t want cash immediately. Putting it in a notice, or term account means it is tied up. The bank gets to use it for other people’s loans, so they’re prepared to pay more.
If they have to keep it constantly liquid in case you want it back, your reward is less. So, for instance, keeping €10,000 fully accessible will earn you a paltry 0.01pc with PTSB and nothing at all with AIB or Bank of Ireland.
However, if you’re prepared to tie it up for five years, PTSB will reward you with 1.25pc per annum.
How to save
Let’s say you start with 1c on 1 March, and double it each day, so 2c, 4c, 8c etc. How much do you think you’d have in the piggy bank at the end of the month? The answer is a whopping €10.7m!
While most of us vaguely remember studying compound interest in school, few of us really understand the practical application of ‘time x interest x money’.
While 100pc daily interest isn’t available, how you split your savings makes a big difference.
We should all have a rainy-day fund – money which we can draw on in an emergency, or when unexpected bills arrive.
Then there are short-term savings goals – less than 12 months for Christmas, back-to-school costs or summer holidays.
Only when goals are over eight years away should you stray from safe deposit-type savings
Medium-term objectives (two-to-six years) could include a new car, college fees or a special trip.
Only when goals are over eight years away should you stray from safe deposit-type savings. This is because investments, particularly in equities, need time to grow and are best invested with expert independent advice according to your risk profile, age, and purpose.
The good news is that banks don’t charge for deposit accounts, when you run a current account, so you can have several on the go.
Naming them by their purpose keeps you on track to save toward your goal – mine are called ‘my car’ and ‘travel’ – rather than by account number.
Paying into them automatically on pay day – in the same way you pay your bills – keeps you in charge. You’re less likely to ‘steal’ from yourself if it is earmarked for something specific.
For those who thought Deposit Interest Retention Tax (Dirt) had gone away, it was simply that there was no interest being earned, so no tax charged.
Now that it has made a return, banks are required to deduct Dirt at source – before they pay you your interest – and return it to Revenue. Dirt is charged at 33pc, except for pensioners, who are exempt if their total income for the year is under €18,000 each, or those who are permanently incapacitated.
Most state savings, such as certificates and bonds via statesavings.ie, are exempt from Dirt, as are prizes won via prize bonds, which doesn’t count as interest.
Deposit Guarantee Scheme
According to the Central Bank, the DGS protects “eligible depositors in the event of a bank, building society or credit union authorised by the Central Bank being unable to pay deposits”. The guarantee covers up to €100,000 per person, per institution.
Alternatives to Irish savings
In the same way that digital fintechs like Revolut are popular for current accounts, depositors can avail of the likes of Raisin Bank (raisin.ie), which has a German licence and describes itself as an ‘online deposit marketplace’. It offers fixed rates for lump sums, and according to Money Guide Ireland, you can get up to 3.35pc before Dirt for five-year rates.
It partners with nine banks across Europe, all of which are covered by the deposit guarantee scheme.
There is a bit of palaver with ID checks when opening an account and it is taking longer than normal due to demand, but a lump sum of €50,000 over three years with French bank Younited gets you 3.3pc AER, or €5,115 gross in interest.
Paying down debt
If a credit card is costing you 20pc and your savings earn 1pc, it is good financial sense to pay off the debt. You’re saving on the servicing costs and freeing up monthly income from repayments. However, transfer the balance to a 0pc rate (see bonkers.ie for a list of cards), and pay it off there. Don’t put anything else on the card in the intervening period or you will be charged the full rate of interest.
When inflation is running at five times the deposit rate, spending instead of saving your cash can be a good idea. If you buy Irish products locally it keeps Finance Minister Michael McGrath happy too!
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