Can you get a decent return on savings in Ireland?
A big problem is inflation. It is still at near record levels, so that means that your savings are unlikely to make a return in 'real' or inflation-adjusted terms.
Deposits in Irish banks are currently at record levels, but interest rates are still on the floor. So what can you do if you have money to save? Where can you get a decent return?
While it is always a good idea to have a rainy day fund, one of the best ways to save money is to simply pay off any debt you might have.
Daragh Cassidy of independent price comparison and switching site Bonkers.ie points out that the interest you will be charged on loans will usually be far higher than anything you will earn on your savings.
"Paying 20% interest on a €2,000 credit card debt makes little sense, for example, if you also have €2,000 in savings that is only earning you 1% interest, and which could be used to fully clear your card balance.”
Another option is to invest in a managed fund. The risk levels are higher, as is the potential return. The big insurance companies: Irish Life, Aviva and Zurich offer these kinds of products.
You can invest in funds like these with as little as €100 a month, or you can invest a lump sum, starting at about €10,000. Your attitude to risk will determine what type of fund your money goes into.
“Those with a lower risk appetite will usually be recommended to put their money into a fund that mainly invests in bonds and a small percentage of stocks, while those who are prepared to take more of a risk with their money can choose funds that invest mainly in stocks, property, and commodities like gold and oil.”
In addition to the risk, you will also be hit hard with taxes, fees and charges, so getting a half-decent return can be tough unless markets move significantly in your favour.
You pay 41% tax on any gains you make. This is because you will be subject to life assurance exit tax, not deposit interest retention tax (Dirt). The Government also takes 1% of every sum that you invest in the form of stamp duty, and you will also be charged a fund management fee of between 1% and 2% a year on average.
Nor do you 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 several days to process. And to repeat, a managed fund is an investment, not a savings product. Depending on how markets perform, you may not get your original investment back.
By contrast, State savings products are safe as houses. And you will not have to pay Dirt (currently 33%). The downside is, of course, the anemic return.
Daragh Cassidy again: "The 10-year national solidarity bond on sale at the moment offers a return of 1.50% interest a year, or 16% in total over the whole 10-year term. Meanwhile, placing your money in a five-year savings certificate will get you 0.98% a year or 5% over the entire five-year term.”
The other big problem is inflation. It is still at near record levels, so that means your savings are unlikely to make a return in 'real' or inflation-adjusted terms. Having said that, the rate is still better than that on offer at most banks right now, and there is that aforementioned bonus: no tax on your gains.
You can exit any time you like, with seven days’ notice, and you will not face any penalty for getting out early.
Alternatively, you could check out the special savings accounts being offered by some of the financial institutions. If you have a specific savings goal in mind, you may be able to get a slightly better interest rate. For example, the EBS Children’s Savings Account is offering 1% interest a year on amounts up to €5,000.
If you are saving for a house deposit, check out Bank of Ireland's Mortgage Saver account, which offers a €2,000 bonus interest on your savings if you then draw down a Bank of Ireland mortgage.
Ireland has among the worst rates for savers in Europe. But things are mot quite so bad on the continent. And one bank — Raisin — is making it easy for savers here to access the higher rates on offer elsewhere.
“Raisin pitches itself as the 'online marketplace for savings across Europe' and allows Irish savers to easily avail of the higher deposit rates on offer on the continent by signing up for its online account.
"Signing up is relatively simple and only requires one online registration. From there, customers can easily choose from numerous savings accounts from banks all over Europe, and subsequently manage their accounts entirely online too.”
Another option is Trade Republic, a Berlin-based digital investment platform, which offers investors easy access to buy and sell stocks relatively cheaply through its app. The other advantage is that any cash you hold in your account that you do not invest will earn 2% interest.
If you hold a pension, another alternative is to top it up. Most experts recommend that you need a pension of at least half your pre-retirement income in order to live comfortably in your golden years. But two-thirds are best.
The average full-time wage in Ireland is about €48,000. This means you would need an income of at least €24,000 in retirement, if not more. The current State pension is just under €13,000 a year, which means most workers can expect to experience a significant drop in their living standards unless they make their own provisions for their retirement years.
Plus, there is no guarantee the State pension will even be around in a few decades' time. Our ageing population may well make that €13,000 a year completely unaffordable.
“The good news is that saving into a pension is one of the most tax-efficient things you can do with your money,” says Daragh Cassidy. “You won't pay any tax on your contributions, up to certain limits, while your savings will grow tax-free. You can also draw down a tax-free lump sum of 25% of your pension pot upon retirement, up to a limit.”
So rather than keep your money in a low-yielding savings account for a rainy day, look at investing it in a private pension, as you can be sure there will be a few rainy days in your retirement years too.
If you are already saving into your own pension through your employer, you can easily make a lump sum 'top-up' or what's called an additional voluntary contribution. Speak to your employer or else chat with a qualified financial adviser to see what is possible.
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