Tuesday 11 December 2018

How you could double returns by ditching low-rate savings accounts (but tread carefully)

 

What do you do with your nest egg?
What do you do with your nest egg?
Louise McBride

Louise McBride

More than 90,000 Irish savers must find a new home for their nest eggs now RaboDirect plans to pull out of the Irish market this May.

Many others are eyeing up new homes for their savings as the interest paid on ordinary deposit accounts continues to be slashed. Not all alternatives to traditional deposit accounts are better homes for savings however so be careful before making the jump from deposits.

The Sunday Independent lined up some investment experts to recommend some alternatives to traditional deposits which savers might consider.

Regular savings

Zurich Life's Easy Access Savings plan and Aviva's Easy Access Regular Saver are two life assurance savings plans recommended by Alpha Wealth as an alternative to the regular savings accounts offered by the banks. To get the most out of either plan, you should save regularly for at least five years. With Aviva's plan, you must save at least €100 a month; with the Zurich Life plan, you must save at least €75 a month. With both plans, you choose the investment funds which you would like your savings invested in - based on the level of risk you are prepared to take on. Risk generally increases your chances of making a good investment return on your savings over time - as long as you're not taking too much of a gamble and are choosing a suitable product.

With Zurich's Easy Access Savings and Aviva's Easy Access Regular Saver, the level of risk associated with the funds which you can invest your savings in varies from one to seven, with one being the lowest risk and seven the highest risk. "For a typical saver, I would suggest that a risk level of four is reasonable - if you have a time horizon of between three and five years," said Nick Charalambous, managing director of the financial advisers Alpha Wealth. "If you have a shorter time horizon than three years, then go for a risk level of three - but if your horizon is less than a year to two years, you should really go back to a bank's regular saver account."

With a life assurance savings plan, you could beat the returns made by a traditional savings account - as long as the investment fund your savings are in performs well. Should you open a Zurich Easy Access Savings plan and wish to invest in a fund with a risk level of four, Zurich's Prisma 4 fund is an option. This fund made a gross return of 5.7pc last year, 8.5pc in 2016, 4.9pc in 2015 and 14.2pc in 2014. The gross return on Zurich's Prisma 3 fund (an option for those who wish to invest their savings in a fund with a risk level of three) was 2.2pc last year, 4.1pc in 2016, 2.7pc in 2015, and 7pc in 2014.

Rabobank’s HQ in the Netherlands — the lender’s decision to pull out of Ireland will affect more than 90,000 Irish savers Photo: Bloomberg
Rabobank’s HQ in the Netherlands — the lender’s decision to pull out of Ireland will affect more than 90,000 Irish savers Photo: Bloomberg

With the Aviva Easy Access Regular Saver, the Multi-Asset Fund Strategic (Risk 4) fund is an option for those who wish to invest their savings in a fund with a risk level of four. This fund made a gross return of 3.2pc last year, 2.8pc in 2016, 4.3pc in 2015 and 10.2pc in 2014.

Bear in mind that as these returns are gross, tax and investment charges must still be paid - and so your investment return will be lower once these are deducted. "Be mindful of fees with these products - as there is a lot of variation between brokers," said Charalambous. The annual management fee on Zurich's Easy Access Savings and Aviva's Easy Access Regular Saver is typically 1.25pc, according to Charalambous.

A big advantage of both plans is that there are no early exit fees should you need to withdraw money. "A lot of other plans have early encashment fees of 5pc in the first year - with the fee then reducing each year after that," said Charalambous.

Jim Hegarty, director of Hegarty Financial Management, also recommended the Zurich Life Easy Access Savings Plan as an alternative to a bank regular saver account. "We see financial strength as very important when it comes to selecting a provider for savings and investments," said Hegarty. "Zurich Life, which has been operating in the Irish market for four decades, is one such company." Hegarty cited the Balanced Fund as an example of a fund which can be invested in through Zurich's Easy Access Savings Plan. This fund has made an annualised return of 6.2pc (gross) over the last 20 years."

Read more: RaboDirect Ireland to close as parent group plans to 'simplify business model and reduce costs'

Lump sums

You'll struggle to earn 1pc interest on a traditional deposit lump sum of €10,000 tied up for five years, and most of the banks pay less interest than that. For those looking to move a lump sum from a traditional deposit account to an investment product with the potential for higher returns, Alpha Wealth recommends BlackBee Investments' 90pc Protected Fund. This product invests in two funds (the Pimco Global Income Fund and the Jupiter JGT Dynamic Bond) and over the last three years, the average combined return on both of these funds has come to 8.5pc - or 2.83pc a year. These returns are inclusive of fees as fees are built into the product. (Total fees come to 4.5pc). "That return seems small but any secure (even 90pc capital protected) product is going to be limited in upside," said Charalambous.

The minimum investment in this product is €10,000 and 90pc of your capital is protected, so you could lose up to 10pc of your original investment. Blackbee's 90pc Protected Fund is a structured product so understand the risk of structured products if you choose it. This product is not covered by the Irish Deposit Guarantee Scheme (which protects savings of up to €100,000 per person) either as it is not a deposit account.

One of the advantages of the BlackBee product is that returns are liable to Capital Gains Tax (CGT) rather than Deposit Interest Retention Tax (Dirt). This means you can earn returns of up to €1,270 a year tax-free (or €2,540 for a couple) with this product as this is the amount of chargeable gains which are exempt from CGT under the annual CGT exemption. The closing date to apply for this product (90pc Protected Fund 11) was March 14. "However, as these products run in tranches, there will be a version 12 which will be exactly the same and which will run to mid April," said Charalambous.

The Secure Bond 8 from Broker Solutions could be an option for those seeking an alternative to lump sum deposit accounts, according to Hegarty. This bond, which invests in European equities, also has a 90pc capital guarantee, so you could lose up to 10pc of the money you invest in this product. "This bond has a risk level of 2 on a risk scale of 1 to 7," said Hegarty. The minimum investment in the Secure Bond 8 is €25,000 and you must invest your money for five years - though you can access your capital during that time. The closing date to invest in the Secure Bond 8 is April 20.

Model portfolio

Another alternative to deposits which is becoming more popular is a model portfolio, according to Paddy Delaney, a qualified financial adviser and founder of the personal finance blog, Informed Decisions (informeddecisions.ie). A model portfolio is essentially a combination of various investments which is available through investment platforms such as Conexim.

"You can invest in model portfolios available through investment managers such as Dimensional and Morningstar," said Delaney. "These model portfolios are not readily available on the high-street - they can be found through some brokers or financial planners. They usually offer a low-cost alternative as the fee is often less than 0.5pc - plus the adviser's fee." One example of a model portfolio is Morningstar's Global Allocation Cautious Portfolio. "This model portfolio, which holds mostly defensive assets, made a return of 4.7pc per annum on average since 2006, despite a global crisis," said Delaney.

Remember, past returns are no guarantee of future gains - regardless of the type of investment you're eyeing up.

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