Saving grace: how your money can work for you...
With interest on savings on deposit inching closer to 0pc, Sinead Ryan looks at the options available to you if you're lucky enough to have built a nest egg
Published 31/03/2016 | 02:30
We're perilously close to a negative interest rate environment. Indeed, if you're a retail bank, you're already experiencing what life on the downward spiral is like. The European Central Bank recently slashed the rates it offers to banks to hold their money on deposit overnight, to -0.4pc. In real terms, what this means is that they are being charged to have their money minded.
Imagine a bank doing that to a customer. Think it couldn't happen? Well, it already has. Switzerland, Japan, Sweden and Denmark are all in negative territory as they desperately attempt to stimulate their economy, or in some cases, shore up their currency. It is, however, an act of desperation. ECB President Mario Draghi said in January there are "no limits" to what he will do to meet his only mandate: get Eurozone inflation to 2pc. He's failing miserably.
In Ireland, you'll be lucky to get 1pc on any money you have on deposit, and it's falling. In some banks, it's already zero. Never have things been so bad for savers. The Government hasn't helped, heaping onerous Dirt tax of 41pc on anything you do make. Despite that, there is over €95billion in household deposits with banks, post offices and State savings - and it's increasing. Six years of austerity has turned sensible savers into frightened hoarders. People are afraid to spend money in case an even rainier day comes.
So, what alternatives are out there? The first question to ask yourself is why you are saving money. If you need it for a specific purpose, in the short term, than keeping it safe is more important than a return. Pick any deposit account and don't worry about it. If it's medium or longer term, you can get a return, but will have to take a risk or put it to better use.
Pay down debt
It's astonishing how many people carry credit card debt, costing them 22pc while having savings attracting nothing at all. Even a personal loan is worth paying off. You'd need to be earning 7pc pa on your savings to make it worthwhile to carry both. Paying off loans is far better value and frees up monthly income.
Pay off the mortgage
If you have sizeable savings, over-paying your mortgage can be a great use for it, cutting both interest and time. For example, paying €25,000 off a 25-year loan of €250,000 at 4.5pc cuts four years, three months and almost €45,000 off the loan. There is no quicker way to almost double your money!
Put it in a pension
Pension contributions attract full tax relief at the marginal rate. An Additional Voluntary Contribution (AVC) is a great way to put away cash you don't need. To get tax relief, it has to be 'earned income' rather than say, an inheritance, or rental income.
The NTMA offers bonds over three, four, five-and-a-half, six, and 10 years. While rates are not terrific, they are tax-free and if you can lock your cash away, they are currently the best guaranteed deposits around. A five-and-a-half-year cert will get you 7pc, or 1.25pc APR net. You can start with just €50 in many cases, with an upper limit of €120,000. See www.statesavings.ie for rates.
Absolute Return funds
These specialist vehicles offer a safer environment to equities, but more risk than deposits. Offered by Zurich, Aviva, Standard Life and others, they are tightly managed, and will tie up your funds for three to five years. Oisin Humphreys of Myadviser.ie says the Standard Life GARS product returned 6.71pc pa from 2006 to 2015 compared to 1.88pc for deposits. Like all financial instruments, it's important to get independent financial advice, preferably from a fee-based broker.
P2P is the sexy newcomer on the block. A posh version of Crowdfunding, investors bid to lend to vetted businesses and start-ups, but in small amounts, spread over a range of companies and industries. There is currently only one middle-man, LinkedFinance, which charges the investors 1.2pc and a typical loan is €30,000 over three years sourced from 200 lenders, with it collecting all the repayments and distributing them monthly. Returns are around 5-15pc but this is a very new arrangement and, as yet, unregulated by the Central Bank although it's all highly transparent as loans are streamed in real time. You can start with €50 and see how you go (there's an AutoBid tool if you're not sure), but be prepared to take the hit if it doesn't pan out. Tax is payable on profits. See LinkedFinance.com for more.