Savers to now be hit with even lower deposit rates
SAVERS are set to be the big losers from the move to drop eurozone interest rates to a level never seen before.
It comes just as savings tax on deposits is due to jump from 33pc to 41pc in the new year, after an announcement in the Budget.
And banks have been cutting the interest rates they pay on deposits for the past year-and-a-half now.
Experts said the surprise cut in European Central Bank rates will prompt continued cuts in deposit rates.
Financial adviser Karl Deeter said: "The lower European Central Bank rate will be passed on to savers. Banks will go on cutting deposit rates."
Banks are paying interest as low as 0.01pc on money deposited with them.
This means that with official inflation showing price rises as low as 0.1pc, savers are losing money by having cash in a bank.
The higher DIRT (deposit interest retention tax) will mean someone with a deposit as low as €5,000 in a bank will end up paying €51 in tax next year, assuming their deposit earns 2.5pc in interest.
And pay related social insurance (PRSI) is set to be imposed on the savings of some people who have income of more than €3,174 a year from so-called "unearned income" – money made from deposits, rents and dividends.
The latest information from the Central Bank is that interest rates paid by banks had been cut for the 16th consecutive month in August.
New deposits left with the bank for at least six months are paying on average just 0.8pc, the Central Bank has said.
Despite the drop in savings rates and the rise in DIRT tax in successive budgets, there is still €91.5bn in household savings in banks, with another €10.46bn in the State's 400 credit unions.
There is around €15bn in state savings schemes, many of which pay interest tax free.
More deposit rate cuts and the rise in the tax on savings in banks in the new year is set to make tax-free state savings schemes good value again.
The state savings certificates pay interest totalling 11pc after five years, with no tax on this. That works out at 2.11pc a year, tax free.
The savings bonds pay interest of 4pc after three years. Expressed on an annualised basis this works out at 1.32pc a year, tax free.
Banks have admitted they may put pressure on the Government to again reduce the interest rates paid on tax-free state savings schemes to deter savers from putting all their cash into these products, which are sold through post offices.