This article was first published in the June 2012 Irish edition of Accounting and Business magazine.
Since the beginning of the recession Irish people have become more conscious of saving their hard-earned cash to provide for their future. Individuals are nervous about their employment prospects and have taken to keeping extra cash aside to provide for a rainy day. Preliminary estimates from the CSO for 2011 indicate that gross household savings increased by €637m to €12.87bn, while the gross disposable income of households decreased by €356m to €88.82bn.
The European Central Bank's main refinancing rate is currently 1% per annum; this is the lowest rate since the formation of the euro in 1999. However, Irish banks have been aggressively competing for savings by offering very high deposit rates. From the banks' perspective, this is an efficient method of taking in money, as opposed to looking for funding from alternative sources. There is a notable disadvantage with this approach - the more an individual believes they will receive in interest from their bank, the less likely they are to spend the money, and boost Irish business. As a result, the minister for finance, Michael Noonan increased the rate of DIRT in the last budget to 30% to discourage high levels of saving and encourage spending.
Regular savings accounts
The major banks are keen to encourage regular savings and, as a result, are offering good rates of interest for regular saving accounts. EBS is currently offering a rate of 4.10% AER on its family savings account. The rate is fixed for one year and up to €1,000 per month can be lodged to the account. Ulster Bank and AIB are offering variable rate regular savings accounts that are currently paying 4% AER. It is possible to save up to €1,000 per month with Ulster Bank and €500 per month with AIB.
There are a plethora of fixed-term deposit accounts on offer from the major banks with terms from one month to five years. Generally, the longer the term you are willing to lock away your money for, the higher the interest rate.
For example, EBS is currently offering a one-year fixed rate of 3.85% AER for amounts in excess of €10,000 and a 15-month fixed rate of 3.98% AER for amounts in excess of €3,000. KBC Bank is offering a 14-month fixed rate of 4.29% AER, which might suit individuals who wish to diversify away from Irish banks. On a medium term basis, Permanent TSB is offering its 26-month Interest First account at 4.47% AER. At the other end of the scale, Permanent TSB is offering a five-year fixed rate of 4.31% AER for amounts in excess of €10,000.
It can often be worthwhile contacting a number of different banks and explaining how much you have to put aside and how much access you require to the monies to ensure you achieve the highest return.
Certificates and bonds
One option worth considering is purchasing savings certificates or savings bonds from An Post. Saving certificates have a term of five and a half years, while savings bonds have a term of three years. It is possible to access the capital during the term, subject to seven days notice, however, the return earned will be less than the AER indicated below. While the headline rate of interest may be less than the interest rate being provided by some banks for deposits, the returns earned on savings certificates and savings bonds are not liable to DIRT, while also allowing access to the capital during the term. The current interest rate being paid on saving certificates is 3.53% AER and 3.23% AER on savings bonds. To achieve these rates in an account where DIRT applies it would be necessary to earn a gross rate of interest of 5% (equivalent to 3.53% AER) or 4.61% (equivalent to 3.23% AER).
For individuals over age 65 with earnings of less than €18,000 per annum for a single person or €36,000 per annum for a married couple, it is possible to apply for an exemption from DIRT or claim a refund of any previously overpaid DIRT.
Alternatives to deposits
So what about investors who have large sums on deposit who do not require access to their funds for a number of years and who wish to achieve a higher rate of return than is currently available under deposits? Prior to the financial crisis, it would have been common for individuals to invest in unit-linked bonds. However, many individual who invested in these bonds during the previous decade found their investments suffered significant falls in value, which, in many cases, they did not expect. A number of these investors who had thought they had a higher tolerance for risk on the upside, found that their risk tolerance level was lower than they had realised on the downside.
Investors who are reluctant to leave all of their monies in bank deposits are looking for products that provide some form of capital guarantee. BCP Asset Management, Bloxham, Irish Life and New Ireland are just some examples of providers offering capital guaranteed bonds. A capital guaranteed investment bond usually provides a guarantee that up to 100% of the initial sum invested will be returned to the investor at the end of the term if the underlying indices do not perform. The capital guaranteed is usually provided by one of the major banks.
A capital guaranteed bond will usually have a minimum premium of at least €10,000 while the term of the investment is generally in and around five years. The bonds are partially invested in deposits and partially in tracking indices. There are a variety of different investment options, from investing in a basket of blue chip stocks or high dividend earning companies to absolute return strategy funds or even oil. Most bonds do not allow access to the initial capital during the term and some bonds may impose a cap on the potential returns to be earned from the bond. When considering investing in a capital guaranteed bond, independent investment advice should be sought from an authorised adviser who is required to recommend the best product for the consumer after researching the market.
There are a variety of deposit account and investment options available to investors, with products available to suit all tastes. It is important to shop around to secure the best deal available. With inflation to the end of March at 2.2% per annum, there is good value available for savers who wish to achieve a return in excess of inflation, without investing in high-risk assets such as equities and property. As a result, now may be an ideal time to lock into a product offering a high rate of return that will protect your capital against inflation in the future.
Oliver O'Connor is director and Mary Daly is assistant manager, Grant Thornton Financial Counselling.