How to build a better nest egg

INTEREST UPFRONT

If you are in need of some money to fund a purchase or project of yours but are loathe to tap into your savings, you could consider an interest-upfront savings account. With this, interest earned on your deposit is paid upfront and directly to you.

So, if you have €100,000 to put on deposit, you will receive a payment of €3,000 straight away if the account pays interest at 3 per cent. If you have savings of €10,000, you can immediately access €300 to be put towards a holiday, although remember that this interest is subject to Dirt at a rate of 30 per cent.

KBC Bank recently launched such a product, which pays a decent rate of 3.8 per cent upfront on savings fixed for a 12-month term. It promises to forward your interest payment by electronic funds transfer 16 days after opening the account. Minimum investment is €3,000 up to a maximum of €1.5 million.

Similarly, Permanent TSB also has such a product, which pays interest from rates of 2 per cent to 3.57 per cent depending on the term. Minimum investment is €5,000.

The advantage of this account is that it allows you to access future earnings today, and helps maintain the integrity of your savings. And, with another austerity budget on the way, if you fear a hike in Dirt (which has jumped to 30 per cent in the past few years) or worry that you will no longer qualify for a Dirt exemption, such an account can make sense.

Be aware, however, that you won’t be able to access your principle sum for the duration of the term and rather than re-investing the interest earned on your savings, which can help protect against inflation, you might be tempted to spend it.

FALLING RATES

It has been touted for some time, but it appears that interest rates are now starting to fall, as banks look to improve their margins.

While European interest rates are at historic lows – just 0.75 per cent with another cut likely – banks in Ireland have kept deposit rates artificially high in an effort to bring in funds and help reduce their loan-to-deposit ratios. But there are signs that the banks are starting to move on the European Central Bank’s latest rate cut.

Given its AAA rating, Rabodirect, a subsidiary of the Dutch Rabobank, has been one of the few banks not to hike up its rates in an effort to boost its balance sheet. Nonetheless, it raised its on-demand interest rate to 3.1 per cent last December, but has since reduced it. From September 5th, savers will only get a rate of 2.75 per cent on amounts up to €20,000, or 2.15 per cent on amounts over this.