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.

But how do you compare this with KBC’s 14-month account that pays 3.4 per cent over the term? The trick is to look for the AER (annual equivalent rate). In the above example, the AER on Permanent TSB’s account is 2.5 per cent, compared with 2.9 per cent at KBC.

Saving for a house?

If you’re in the market for regular savings, such as building up a deposit to buy a house, or saving up for an extension or holiday, a regular savings account can offer the best deal. Just be warned that the days of generous offers – such as a rate of 5 per cent, which both EBS and AIB used to offer – are long gone.

Nonetheless, with the ECB rate languishing at just 0.75 per cent, there are still deals to be had. Permanent TSB, for example, offers a rate of 3.5 per cent on amounts up to €50,000, although the catch is that you must already be a customer of the bank. EBS offers 3.1 per cent on its family savings account on amounts up to €1 million, while both AIB and Ulster Bank has a rate of 3 per cent.

In terms of return, however, An Post is the best option, given its tax advantage, with a rate of 2.9 per cent available on amounts up to €12,000. However, the full term of the account is six years (save for one year, leave balance on deposit for five), so it might not suit everyone.

Finally, remember that at the end of one year, your bank is likely to switch your balance to a lower yielding account. So, if you have saved €200 a month all year, then €2,400, plus interest, might be transferred to an account paying less than 1 per cent in interest, while all new contributions will earn interest at the higher rate.

To avoid this, simply transfer your balance at the end of the year to a higher yielding account, and keep making your regular payments.

Education fund

As with all long-term savings, the earlier you start, the greater the amount you can save, thanks to the magic of compound interest.

For example, if you start putting away your children’s allowance of €140 a month from the moment you start receiving it, by the time they’re 18 you’ll have about €41,000 saved if you earn interest at 2.5 per cent. Leave it till they’re eight years of age to start saving, and you’ll have just half of that by the time they go to university.

The key when it comes to choosing a savings account for this purpose, is to find one that probably doesn’t have “child” in the title, as these are often less attractive than regular savings accounts. An Post’s Childcare Plus account is one notable exception.

Tax bill

If you’re self-employed, or generate income from sources outside of the PAYE bracket such as from an investment property, putting aside funds to meet your tax bill is likely to be a priority. But if you have a lump sum waiting to be paid come next October, you could try and defray your bill by earning some interest now.

Danske Bank has a 1.31 per cent rate on a four-month fixed-term deposit, for amounts between €2,000 and €2 million. If, however, you rush to lodge your money and will pay your tax bill online, you might just make KBC’s nine-month deposit account, which pays 2.16 per cent over the term on deposits starting from €3,000.

Another option is to consider Nationwide UK’s Notice Plus account, which pays a rate of 2.75 per cent on an annual basis. Provided you give 30 days notice of withdrawals, you won’t incur any penalties or interest deductions.

Foreign currency

If you have a liability in a foreign currency – perhaps through a US investment property for example – or would like to exploit currency differentials, a sterling or US account might be for you.

If you are taking a punt on another currency, however, remember that exchange rates can just as easily work against you. Also, if you still fear a collapse of the euro, such accounts may offer no protection against such an eventuality.

Nationwide UK now offers a sterling account for Irish savers, on amounts between £2,000 and £2 million for which it pays interest at a rate of 1 per cent on its easy-access option, rising to 1.5 per cent for amounts fixed for 12 months.

Investec offers a range of 11 foreign currency accounts, with both variable and fixed-rate options on amounts starting at €20,000. For example, you can earn 1.25 per cent on a 12-month fixed Canadian dollar account, or 3.5 per cent if you put your money into Australian dollars over the same term. The best return (in terms of interest rate) is to be had on South African rand, with savings earning 5 per cent over a year.

Dirt hike fears?

Given the consecutive increases in the rate of Dirt over the past few years, it would be no surprise if the Government opted to push it up once more later this year.

To avoid paying the extra charge, you could consider opting for an account which pays you interest up-front. If you are a small business owner or are self-employed, this can also help with cash flow.

KBC, for example, pays 2.8 per cent on amounts between €3,000 and €1.5 million, fixed for a year. You are only allowed to withdraw your funds at the end of the term, but you do have the option of taking your interest 16 days after opening this account. So, if for example, you have a lump sum of €20,000 to put on deposit, you can expect to earn €376, while if you have €100,000 to lodge, you can walk away with about €1,800.

Savings guarantees

It has been impossible to talk about savings in the past few years without discussing the importance of counter-party risk and what guarantees apply. This was thrown into sharp focus once more with the liquidation of Irish Bank Resolution Corp earlier this month, and remains a key consideration for savers.

Firstly, for savings up to €100,000 per person in any given institution, the permanent Deposit Guarantee Scheme applies. This promises to repay any savings within 20 days in the case of insolvency or liquidation. This guarantee applies to the following institutions: ACCBank, AIB, Bank of Ireland, EBS, Permanent TSB, KBC Bank, Danske Bank, Ulster Bank and the credit unions.

If you opt for An Post, all your savings come with a government guarantee, so there is no upper limit, while banks that operate in Ireland on a branch basis – such as Rabodirect and Investec – are covered by schemes in their own countries.

Deposits of more than €100,000 in Irish covered institutions are protected by the Eligible Liabilities Guarantee scheme, which is due to run out this June, although it may be extended once more.