Tuesday 20 August 2019

Over-50s finance: Money in the bank

Charlie Weston explains how to make the most of funds on deposit by choosing the right account

For households, the figure works out at €56,851 each in savings.
For households, the figure works out at €56,851 each in savings.

WE Irish are tremendous savers, says Simon Mo­y­­­nihan of price com­parison site Bonkers.ie.

Saving money is a habit we've maintained despite the banking crisis, the housing collapse and the worst recession in the history of the state, he says.

"By themselves, any one of these events should lead to a huge reduction in the money people keep on deposit, and all three together are fully capable of starting a run on the banks... But not in Ireland."

Over the last seven years, we've weathered unemployment, falling incomes, increased taxes and collapsing property values - and we've still managed to maintain a huge amount of money in the very banks that brought us many of our recent problems.

In fact, there is €20,400 on deposit in Irish banks for every man, woman and child in the country, Mr Moynihan calculates.

And if you look just people aged 25 and older, there is around €31,000 for every man and woman in Ireland, a staggering amount given the trauma of the last few years.

For households, the figure works out at €56,851 each in savings.

"Certainly, we keep an awful lot of money in cash deposits, but what's really interesting is that we seem to have defied the European Central Bank, our own government and even economic theory.

"And that's because we haven't just maintained our savings over the last few years, we've actually routinely increased them and now have the highest level of deposits held with Irish banks since January 2011 at a staggering €93.77bn - and that's just private households," Mr Moynihan said. In fact, since 2009, the amount Irish private households keep on deposit has never gone below €90bn, he says.

DIRT and defying government policy

When the crash hit, cash was urgently needed to stimulate the economy, Mr Moynihan said.

The State was well aware of how much money was sitting in the deposit accounts. "So the government decided to try and loosen up some of that cash. And it tried and tried. Every year from 2008 to 2014 Deposit Interest Retention Tax (DIRT) was increased."

And over those years, the DIRT rate went from 20pc up to 41pc. But it didn't stop there. For many people PRSI has to be paid on savings interest now too, which effectively brings the DIRT rate up to 45pc. And yet Irish people held on to their deposits and kept saving.

Defying the ECB

The European Central Bank didn't stand idly by either, Mr Moynihan says. It wanted people to spend Europe out of the recession too, so it started lowering its interest rates. In 2008, the ECB rate was 3.75pc. In the following six years, the ECB cut that rate 15 times and it now stands a fraction off zero at just 0.05pc. The lowest it's ever been.

Savings returns have fallen by 74pc

The knock-on effect of the rock-bottom ECB rate is that the savings interest rates paid by the banks have fallen substantially too. The best interest rates on benchmark one-year term deposit accounts have collapsed from 3.5pc in 2010 to just 1.15pc in 2015. With such low interest rates coupled with a higher DIRT rate, savers are earning 74pc less on their savings than they were five years ago. Until recently, savers were ­losing money by keeping their cash on deposit due to inflation, Mr Moynihan from bonkers.ie says. The drop in interest rates and increase in DIRT has affected savings returns so dramatically that a household with €10,000 on deposit in the best one-year term account available will earn just €67.85 after one year. Back in 2010, the same household would have earned €265.50 on the same €10,000.

And yet Irish households continue to save

"The savings habit has proven to be as solid as the Rock of Cashel," says Mr Moynihan.

"It has defied Department of Finance and a government policy that has specifically targeted savings by increasing DIRT and reducing returns."

The savings habit has even defied the ECB and continued to save despite record low interest rates.

But he says that the savings habit has not been rewarded by our banks which have all reduced interest rates to a point where it is difficult to realise any meaningful return on savings.

Three of the best: Regular savers

Regular saver accounts are designed for people that want to put away a certain amount every month. They typically offer the best interest rates, but have limits on the amount that can be maintained in the account and often limit withdrawals.

4.0pc - KBC - EXTRA Regular Saver Account

* Save from €100 to €1,000 per month and withdraw funds on demand

* Max balance €40,000

* Must have or open a KBC current account.

3.0pc - Nationwide UK Ireland - Regular saver

* Save from €100 to €1,000 per month. Two withdrawals permitted without penalty

* Max balance €15,265

* This account requires a monthly lodgement and has a 15-month term.

3.0pc - EBS - Family Savings Account

* Save from €100 to €1,000 per month. One withdrawal permitted without penalty

* Max balance €12,000

* This account requires a monthly lodgement and has a 12-month term.

Three of the best one-year term

One-year term accounts are best suited to people that have a lump sum that they are able to put away for a period of time. The most popular are 12-month term accounts which typically offer competitive rates of interest, although returns have fallen over the last few years.

1.40pc - KBC - Extra 12-Month Fixed Term Deposit

* Lodge between €3,000 and €100,000

* No withdrawals permitted during the term

* Must have or open a KBC current account.

1.0pc - Nationwide UK (Ireland) - 12-Month Fixed Rate Savings Account

* Lodge between €3,000 and €2m

* No withdrawals permitted during the term

* Nationwide UK Ireland offers a 1.15pc 12-month term account for existing customers that have been with the building society for more than 12 months.

0.85pc - Permanent TSB - 1-Year Fixed Term Deposit

* Minimum lodgement €5,000. No maximum withdrawal during the term will incur a penalty.

Three of the best demand deposit

Demand deposit accounts can be used for lump sums or as regular savings accounts. They offer the flexibility of access whenever you wish and some accounts offer competitive rates of interest.

1.25pc - RaboDirect - Demand Deposit Account

* 1.25pc AER paid on balances up to €50,000 - lower rates apply on larger amounts

* Instant access. Online only.

1.05pc - KBC - Smart Access Demand

* Minimum balance €3,000, maximum balance €100,000

* Instant access.

1.01pc - Nationwide UK (Ireland) - Easy Access Savings

* Minimum balance €3,000, maximum balance €2m. Six withdrawals permitted per year.

Irish Independent

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