How to build a better nest egg

In unpredictable times, a savings account can offer a real sense of security. But there are many options out there, and it pays to know the best fit for you

AS SAVINGS rates in Ireland continue to rise, Irish households are now putting away about 15 per cent of their disposable income. Given the level of economic uncertainty at domestic and global level, it’s unlikely to come down any time soon.

However, while locking money away rather than spending it might be bad for the economy, having a little nest-egg on deposit does offer peace of mind. So for those looking to maximise their return, what are the latest trends in the savings market?

ACCESSIBLE FOREIGN CURRENCY ACCOUNTS

While the past few years may have seen Irish savers cross the Border to save their money rather than spend it, or travel to Switzerland or Norway in order to keep their money outside of the euro zone, it is also possible to put your money on deposit in a foreign currency from the comfort of your home.

Nationwide UK (Ireland), the Irish arm of the UK building society, recently launched a range of sterling deposit accounts aimed at Irish savers. It offers several options, including an easy access account, which pays interest of 1 per cent AER. Lock-in for six months and the rate rises to 1.25 per cent AER, or up to 1.5 per cent for 12 months. The minimum deposit is £10,000 (€12,512) up to a maximum of £2 million (€2.5 million).

At Investec, you can put from €20,000 into a wide range of currencies, including sterling, Swiss francs, Canadian dollars and Norwegian kroner. Interest rates are again on the lower side, at about 1.5 per cent for a 12-month term, although if you’re prepared to consider Australian dollars, interest rises to 4.25 per cent AER.

At Permanent TSB, you can get a US dollar account, but interest will be just 0.10 per cent on amounts up to $5,000.

If you have outgoings in a foreign currency, perhaps through a property investment for example, it can be wise to keep some funds in that currency to hedge against fluctuations in the currency. But as you lock into your chosen currency at a point in time, you will also miss out on any gains should the currency move in your favour. In addition, interest on such accounts tends to be minimal.

And if you lodge your funds with a bank based in Ireland – even if it is a foreign currency account – there is no guarantee that should the euro collapse, or Ireland leaves the single currency, that your funds will remain in this currency.

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.

Similarly, Permanent TSB has recently moved its rates downwards. The bank, which took over the deposit book of both Irish Nationwide Building Society (INBS) and Northern Rock’s Irish business last year, has decreased most of its rates as of today (September 18th). From now on, its online regular saver account will only pay 3.5 per cent, down from 4 per cent, while the rate on its 21-day notice account has fallen from 3.35 per cent to 2.85 per cent. Those who put money into INBS’ instant-access account will now only get interest of 2.25 per cent, down from 2.75 per cent previously.

And Bank of Ireland has moved far away from those heady days when it was offering some of the best rates on the market. Now the best rate you can get with the bank is 2.95 per cent.

A MOVE AWAY FROM THE GUARANTEE

While we all know that the move, on that fateful night of September 30th, 2008, to guarantee the entire liabilities of the banking sector was to prove extremely costly for the country, it did however offer some comfort for savers opting to put their money into banks covered by the Eligible Liabilities Guarantee (ELG). But while this guarantee, which covers deposits in excess of the €100,000 guaranteed under the Deposit Guarantee Scheme, is due to run until the end of this year, and may be extended thereafter, institutions are already starting to move away from it.

Earlier this year, Bank of Ireland pulled its Isle of Man and UK operations out of the scheme, while last month, AIB announced that deposits placed with it in Britain and First Trust Bank in Northern Ireland would no longer be covered by the scheme.

And now there are tentative moves to do so across all of Ireland. Since late last year, corporate and institutional investors can avail of the option to make unguaranteed deposits under the ELG scheme, provided that they give their express permission, and in return can get a better rate of return for doing so.

Given the cost of the ELG to the country’s beleaguered banks – last year AIB paid €488 million in ELG fees for example – it is to be expected that where possible, banks will move to drop this cost by offering non-guaranteed savings options. Provided, of course, savers have an appetite for this.