Calculating the best returns on your savings
As banks begin to pay lower interest rates for money on deposit, you need to shop around to get the best deal
If the silver lining of the banking crisis was that the interest paid on savings was at above-market rates, then the cost of the banks’ gradual rehabilitation may be lower returns on our nest eggs.
As banks take a step back from shoring up their balance sheets by amassing deposits, they have started to pay less for borrowing from you. So how can you still find the best deals?
The tax-free option
In the last Budget, the tax levied on interest earned on deposits (Dirt) was hiked once more, up to 33 per cent. This is an increase of 22 per cent from 2011 and means that one-third of all the gains you make on your savings is now being taken by the Revenue Commissioners.
One way of circumventing this, however, is to opt for tax-free savings with An Post. While An Post fell out of favour at the height of the sovereign debt crisis as savers fled the State-owned institution, with the State once more in a relatively solid position, it is again a good option.
Although rates fell last December, An Post products still offer good value, given the tax relief available. For example, you can earn 15 per cent over five years with its Saving Certificate product. So if you invested €5,000, you would have €5,749, or a return of almost €750 at the end of the term.
If, however, you had invested the same amount with a regular financial institution, your total return would be just €500 once Dirt had been deducted.
The downside of An Post products, however, is that they typically require you to lock away your funds for a fixed period of time.
A rainy day fund
If you have a lump sum on which you want to earn a return – but which you will need easy access to in case that rainy day comes sooner rather than later – an easy-access account might be your best option.
By shopping around you can still earn a return on your funds, while being able to withdraw from the account at any time without incurring a penalty.
Best on the market in this category is KBC’s Smart Access Demand account, which pays a healthy 3 per cent on amounts up to €100,000. Ulster Bank’s Direct Saver account has a rate of 2.6 per cent on savings between €5,000 and €1 million, while Nationwide UK offers a rate of 2.5 per cent on amounts between €2,000 and €2 million, and Rabodirect 2.45 per cent on amounts up to €20,000.
A lump sum
If you’re prepared to lock away your funds for a fixed term, you might benefit from a higher rate. In the current market, this is less likely, however, with institutions reluctant to commit to paying a higher rate over a longer-period. As a result, many of the best rates are available for regular savings and variable rate accounts. These, of course, can be changed at the whim of the institution.
Nonetheless, there are some reasonable deals available. Permanent TSB, for example, pays 2.5 per cent per annum on its 26-month fixed-term account, or 5.28 per cent over the term, while KBC has a 36-month deposit account that pays 3 per cent a year, or 9.28 per cent over the term.
Another option is a three-year savings bond from An Post, which pays 2.28 per cent a year, or 7 per cent over the term, tax-free.
Be careful, however, that you compare like with like. When it comes to terms, different providers have different offerings – and different rates. For example, Permanent TSB offers a 16-month fixed account that pays interest of 3.35 per cent over the term.