In your best interest: how to get the greatest return on your savings
With interest rates so low it’s not the best time to be a saver but spreading your cash could optimise returns
It’s not the best time to be a saver. If, two years ago, Irish banks were willing to pay a premium for deposits to lower their loan-to-deposit ratios, a recovery of sorts means that those days are largely gone, while European rates remain on a downward trajectory, as evidenced by the latest decision from the European Central Bank.
But despite this, for many consumers security of capital is still more important than return, which is why so many still favour deposit accounts as a home for their money.
However, even if savers are wary of the stock market, they could still bring a little investment nous to how they structure their savings, and consider a portfolio approach to ensuring they get a spread across the various deposit account on offer.
The savings environmentThe ECB may have introduced negative rates for lenders for the first time, but savers shouldn’t be alarmed.
“It’s important to remember that it’s for banks depositing at the ECB. It’s a way in which the ECB will try and incentivise banks to put money to work elsewhere or deposit in the inter-bank market. I don’t think we’ll get to the stage where we’ll see negative interest rates for savers,” says Dermot O’Leary, chief economist with Goodbody Stockbrokers.
What the move does mean is that with the ECB’s key rate now cut from 0.25 per cent to 0.15 per cent, there is “still further scope for Irish banks to bring down term deposit interest rates”.
“It will give banks further reason to go ahead and do that,” suggests O’Leary, adding he doesn’t expect rates to go up until Q4 2016 “and could be in to 2017”.
And it’s not just the ECB that’s disincentivising savers. Last October, the Minister for Finance raised the rate of DIRT to 41 per cent, and imposed PRSI at 4 per cent on those earning more than €3,174 in interest on their savings.
In addition, Irish banks are no longer willing to pay over the odds for deposits to boost their balance sheets. As O’Leary notes, AIB now has a 100 per cent loan-to-deposit ratio which means that it doesn’t have the same sort of pressure to raise deposit levels.
So for savers, low rates are likely here to stay for quite some time yet.
Long-term optionsIf you want to get the greatest return on your money, the best option is to typically lock away a lump sum for a fixed term. Remember, when comparing fixed-term bank accounts look for the AER or annual equivalent rate, as most providers will also give you the gross rate for the term – which may look more enticing but makes it difficult to compare like with like.
For example, if you were offered 3.39 per cent over 18 months, or 3.53 per cent over 24 months, which would you say is the better rate? It’s actually the former, with an AER of 2.25 per cent compared with 1.75 per cent for the latter.
the better rates? Permanent TSB offers 2.25 per cent on amounts from €5,000. So, if you put €50,000 into such an account you will have earned €2,190 (before DIRT) by the end of the term. It’s also an “interest first” account, which means you’ll get your interest within 30 days of opening the account.