By Nick Charalambous
Some 90,000 customers were affected by RaboDirect’s closure earlier this month and many are no wiser on what to do with their savings.
If you Google RaboDirect, you will see a bombardment of offers, from banks to gold companies. Rates offered by the banks are miserly — the best deposit rate currently is 0.65% per annum gross interest through KBC.
If you are not satisfied by using the banks as a vault, what are your options?
The risk alternatives such as the stock market and property are not viable for the vast majority of savers.
The risk and knowledge required to invest in the stock market acts as a barrier, and the current level of property prices — which is only relevant for those with larger sums — acts as a major deterrent.
However, one strong option for those with non-tracker mortgages is to use some of your savings to pay down part or all of it. The average mortgage interest rate for 90% loan-to-value variable rate mortgages is 3.725% per annum, according to moneyguideireland.ie.
If you allow for tax on this 3.725% interest cost, this means you would have to earn 5.56% per annum, allowing for 33% DIRT tax, to generate the same return.
As paying some of you mortgage off is a risk free option, this is a phenomenal return compared to the best deposit rate on the market — currently An Post’s 10-year national solidarity bond paying AER 1.5% per annum.
Once interest rates start to rise, this will save even more in interest costs you would suffer on your mortgage.
If your savings are for your kids, paying off some of your mortgage may not be an option.
Although if you paid off some of your mortgage by way of a lump sum, the reduced monthly repayments to your mortgage might allow you to save more per month into a children’s savings account.
For regular savers, the only option that gives people a chance of keeping pace with inflation are those on offer from some of the life assurance companies.
Examples include Zurich and Aviva, which havetargeted RaboDirect customers with ‘easy access’ savings accounts, with bonuses such as cash incentives added to these accounts.
To really benefit from these accounts, the aggregated returns over several years makes the difference. Whilst these are accessible without penalty, realistically, these are suitable for those looking to save for five years plus.
Returns on these accounts vary, depending on the degree of risk customers wish to take and lump sums can also be added.
There are also lump sum options which provide exposure to certain asset classes which benefit from more tax efficient means.
Examples are, the Government-backed Employment Investment Incentive Scheme (EIIS) which provides tax relief at the higher rate to investors over a four-year period.
Also companies like Blackbee Investments offer investments which are liable to capital gains tax (CGT), currently 33%, as opposed to higher forms tax such as DIRT at 37% for deposits, or EXIT tax at 41% for life insurance company savings/investments).
The benefit of CGT-based investments is that they benefit from allowing investors to use their CGT annual allowance of €1,270 per individual (or €2,540 per couple) of “profits” per annum before they are liable to pay tax.
Also for those that have lost money in the past on property sales or shares, they can use the CGT loss from the past for any CGT gains in the future. This means these investments may be completely tax free.
One big consideration to watch out for are fees — for regular life assurance savings plans such as Zurich and Aviva, which are typically invested in broad diversified funds, can vary from entry costs of 0% to 5% of your contribution, and management charges of between 1% to 2% per annum, depending on the broker.
Imagine the impact on your returns if you are paying roughly 7% per annum in fees.
My strong advice is to look for an independent broker not tied to a bank or a particular insurance company, who can give you a range of options rather than the one that particular institution is pushing.