Disappointed with returns to savers from deposits? There are other options

With deposits unlikely to offer anything but the smallest of returns over the short to medium term, savers remain disappointed with what’s on offer but are loath to consider other options.

But, apart from equities, there are plenty of other opportunities out there; all, however, are a lot more risky than deposits. So what are some of the options?

Invest in a small business (or fund)

One option is to boost your returns by paying less tax. The Employment and Investment Incentive Scheme (EIIS), formerly known as the Business Expansion Scheme, allows retail investors to claim tax relief on investments in emerging companies.

The scheme has been under some scrutiny from European eyes in recent years, and has suffered from some delays. Minister for Finance Paschal Donohoe recently announced that the scheme is set to move towards self-certification, which should make it more streamlined and efficient.

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Under EIIS, an individual can invest up to €150,000 in any one tax year, and tax relief is offered in two tranches – 30 per cent in year one, with a further 10 per cent in year four, provided additional criteria are met. So, for example, someone investing €80,000 will be able to avail of benefit of tax relief of €24,000 in year one, plus €8,000 in year four.

This relief can be offset against tax owed, and can even be offset against rental income. In addition to tax relief, investors will also hope to benefit from a return on their investment, which, if it materialises, will be subject to capital gains tax.

Bear in mind that the scheme typically works best for investors who can lock away their money for the medium term – about four-seven years – and there is always a risk that investors will lose some, or all, of their investment.

Investors can access the scheme in one of two ways; 1) by investing directly in companies, and 2) by investing in a “fund” of such companies.

BVP Investments has successfully raised and managed 11 BES and EII scheme investment funds since 2007, investing on behalf of clients in a range of renewable energy projects and innovative companies such as Celtic Bioenergy, ParkPnP, Health Beacon, Crowley Carbon and UrbanVolt.

It is currently fundraising for its 12th BVP EII Fund, with a target of delivering returns of 15 per cent a year (including tax relief at the marginal rate). It requires a minimum investment of €5,000 and the closing date is December 31st, although it may close earlier if they reach their target investment of €4-€5 million earlier.

Goodbody is also set to open its 2018 fund shortly, while Cantor Fitzgerald and BDO also offer EIIS funds.

Investors can also target individual companies. Dublin Vinyl, for example, is a Dublin-based record pressing plant. Its investment is a four-year term and has a minimum investment of €10,000.

Another option is Solar Stream Limited, which produces clean renewable energy. It is looking to raise up to €2 million and offers investment from €10,000, with a projected buy-out price of €1.10 for every €1 invested.

Invest for an income

If equities are simply too risky for you, a less volatile option might be an income fund. These funds invest in assets that offer dividends or interest payments, and target a specific yield. This yield is then typically reinvested in the fund.

Traditionally, income funds invested in government and corporate bonds, and high yielding equities. But with interest rates (yields) on bonds so low, they too have struggled to offer a return.

Aberdeen Standard Investments launched its first diversified income fund last August, targeting savers who are looking for a better return than what is available on deposit. A medium-risk fund, it targets a yield of 4.5 per cent, and is invested in a range of assets, including social housing, renewable energy, aircraft leasing, specialist credit, and emerging markets bonds.

"Due to the much broader and more diversified asset mix, this fund has historically been less volatile than traditional multi-asset funds," says Mike Brooks, head of diversified assets with Aberdeen Standard Investments.

You can invest in the fund from just €25 a month via a pension fund, such as a PRSA, or €125 a month with a regular saving account. Or you can commit a lump sum investment from €10,000.

Investors can either draw down a required percentage income from the fund or they can leave it to grow further and access it when they wish.

Another option is the Aviva Investors Multi-Strategy (Aims) Target Income Fund, an “all-weather fund” which targets a gross annual income of ECB + four percentage points “regardless of market conditions”, while Goodbody offers three dividend income funds which target returns ranging from the less risky fund which has a benchmark of cash + three percentage points, to the riskier all equity fund which aims to meet the MCSI World Index.

Setanta Asset Management’s Income Opportunities Fund targets an annual return of 4 per cent, and is primarily invested in equities like Harley Davidson, BASF and Vodafone, although it will also consider other asset classes.

Charges on these funds can be high, however, so savers/investors should consider whether they will get the returns they’re looking for. Aviva offers the following warning in documentation for its income fund: “While the underlying fund aims to preserve capital, charges are likely to erode the value of your capital in the AIMS Target Income Fund (Ireland) in today’s low interest rate environment.”

Aberdeen Standard, for example, charges 1.35 per cent a year, while Aviva charges 0.35 per cent more for its income fund than its other fund range.

Of course if returns are substantial, they can outweigh the cost of hefty charges. But you can’t expect this to be the case. Recent returns have been muted.

For example. Goodbody’s Dividend Income 3 fund returned just 1 per cent in the year to October 2018, while the 6 fund also underperformed its benchmark, returning 2.9 per cent in the year to October, compared with 4 per cent for the MSCI World Index.

Aviva’s Aims fund has also underperformed and is down by almost 4 per cent in the year to October, while Standard Life, after a few years of beating its target – by almost 10 per cent in 2017 for example – is also below target this year. It returned 1.91 per cent in the year end-October.

Setanta has done better, and is up by 4.1 per cent in the year to September 2018.

Get your capital protected

If you like the idea of a better return by investing in equities, but fear losing your money, you might consider a structured investment which offers an element of protection on stock market investments.

MMPI Limited is offering the latest round of its Escalator Plan, Series 55, which promises a return of up to 4.9 per cent over 12 months.

It offers conditional soft capital protection on EuroStoxx 50 Index, in conjunction with BNP Paribas, and pays a coupon of 4.9 per cent after 12 months “dependent on performance”, up to 24.5 per cent over the maximum term of five years.

Investors have two options;

1) is to base performance on that of the EuroStoxx 50 Index, or;

2) the EuroStoxx 50 Index and Nikkei 225 Index.

If, after a year, the index is above its initial level for the first product, investors will receive their initial capital back plus a return of 4.9 per cent. If it is not ahead at that point, but it is after 18 months, investors will receive back their money plus a return of 7.35 per cent, and so on.

The second option carries a higher potential return, of 8.85 per cent, or a maximum return of 44.25 per cent.

However the protection offered is only “soft” which means that investors’ capital will be at risk. This means that should the underlying index fall by 40 per cent or more, and remain at this point at the final valuation date, investors will just get back what the index is worth at maturity. On the second option, investors will receive the performance of the worst performing index, if one or both indices have fallen by 40 per cent or more.

And such products can also be pricey; MMPI charges 5 per cent of the amount initially invested for example, which also goes on set up charges. Closing date for the bond is December 21st, and MMPI notes that any gains will be subject to capital gains tax.

Cantor Fitzgerald also has a range of protected options, including those for the more risk averse. Its Protected Best Select Bond V offers 90 per cent capital protection, as well as equity exposure to an index of eight investment funds. It has a minimum investment of €10,000, a term of five years, and its closing date is December 12th.

Again it might be expensive for some investors; if you cash it in in year one, you’ll experience a reduction in yield of 7.77 per cent, falling to 2.13 per cent in year five.

Become a property lender

Another option is peer-to-peer lending, whereby you lend your money to small businesses via platforms such as Grid Finance or Linked Finance, in return for significantly higher interest rates than you could expect from a deposit account.

Unique Publications, a Dublin based diary and journal publishing company, offered a return of 14.5 per cent for example on its loan and raised €52,000 in one second via Linked Finance.

Or you could lend to someone purchasing a property. Property Bridge has just launched in Ireland, looking to match borrowers with lenders, and says it has already signed up over 750 small lenders or investors, with the aim of having 10,000 lenders on its platform over the coming year.

It specialises in smaller developments, of between €500,000-€2 million, and allows investors put in as little as €500 to help fund a loan, with returns of about 8.5 per cent on offer.

It has already completed its first loan, of €250,000 to fund the construction of a mews property in Sandycove, south Dublin, and is eyeing up its next loan, a project for six social houses in Kilkenny, which is looking to raise €200,000, and is also offering an interest rate of 8.5 per cent.

And investors don’t have to consider just Ireland. According to a spokesman for Easymoney, the personal finance business from Easyjet founder Sir Stelios-Haji-Ioannou’s “easy” family of brands, Irish investors can also invest in its P2P property platform.

Easymoney matches property professionals looking to borrow short-term finance (from three to 24 months) for business purposes, secured against UK property, with investors looking to invest. Its accounts offer target returns of 4.05 per cent and 7.28 per cent; returns which are achieved by investing in multiple property-backed peer-to-peer loans. All loans are secured by a legal charge over property, at a maximum 75 per cent loan-to-value in the “conservative” 4.05 per cent account.

Of course P2P property lending is not for the risk averse; risks abound, including challenges with liquidity if no-one else is willing to buy your loan; late payments on loans; as well as a potential loss of capital