Where can I get a risk-free return on a six-figure sum?

Q&A: Dominic Coyle

I have a six figure sum in a deposit account due to mature next month. The interest is very bad. It's with Bank of Ireland and they want me to meet an adviser there about my options. Maybe a five-year term low risk. The money I got was from a house sale. I don't really like the idea of risk. Any ideas, Post Office and so on? I don't mind it being put away three to five years or so.

Mr JB, email

Answer:

Maturing investments are proving a right headache at the moment, especially for low risk investors.

You’ll have seen the news last week that Bank of Ireland is joining the growing trend by financial houses of charging customers for deposits. It is only major corporate customers – those with more than €10 million in the bank – that will have to pay, but even the idea that depositors are having to pay banks to hold (and use) their money tells a tale of a deeply dysfunctional market.

Essentially, it is proving next to impossible to make a decent return on cash at the moment, unless you are willing to take chances, and even then there's no guarantee it will not go against you. For the banks, the option is to lodge the money with the European Central Bank, which is considered the safest way of ensuring they don't lose anything.

This, however, runs counter to ECB policy, which is looking to encourage banks to invest in the real economy in an effort to improve the economic situation in Europe. When persuasion didn’t work, the ECB eventually brought the rate at which they accept deposits from the banks overnight down below zero. So the banks are paying the ECB to accept their money.

Where banks turn to the ECB for a "state guarantee", individual consumers tend to turn to State savings , i.e. An Post. You may not make much on your money – from 0.33 per cent per annum on three-year savings bonds to 0.98 per cent on five and a half year savings certificates – but it is tax free and more than you make on basic term deposit with the banks.

And while you can make a better return by investing in funds with Bank of Ireland or elsewhere, you will have to accept some level of risk. As a general rule, the higher the risk, the higher the potential returns – but that also comes with a higher risk of losing some or all of your money.

At least, with An Post – like the basic bank deposits – you’re backed by a State guarantee that you will get your money back.

The bad news for investors is that the outlook does not signal any easing in the harsh and volatile investment environment over the medium term; in fact, the post-Brexit turmoil, exacerbated by problems with the Chinese economy and uncertainty around the US presidential elections, mean choices are likely to remain difficult.

I was wondering what you think is coming up in the next budget? At present a house is tax free if you’ve inherited it while living in it for a few years, but I read that this is being reviewed. I’d just like your take on this.

Mr J.McJ, email

Answer:

At this remove, it is hard to have any clear sense of what will be in the budget in October, although there has been some fairly clear signalling of an intention to address/reduce the impact of the universal social charge. Ironic really, as it operates more cleanly and transparently than a lot of our tax system.

In any case, the two driving forces shaping the budget will be, first, the Government’s determination to be seen to share some of the benefits of the recovery – especially after the last election showed the presumption of a rising tide lifting all boats was not shared by the electorate. This might be mitigated somewhat by the second influence – the impact of the UK Brexit vote on the Irish economy and the exchequer.

One of the things that has been brought into the mix is the relief you’re talking about – dwelling house relief. I certainly did see some venting in certain media channels on the subject, much of it very exaggerated.

However, it is true to say that the number of families availing of the relief has jumped sharply, and there are concerns in Revenue circles that it is being abused – which it most likely is.

As usual, eagle-eyed tax specialists have been advising their often wealthy clients of the possibility of providing a home for children without any tax implications on. They have been surprisingly open on the subject of such “tax planning”.

Revenue has been clamping down recently on the practice of wealthy parents financially supporting the lifestyles of their adult children. Most recently in the 2014 Finance Act, it tightened up the rules for such support under section 82 of the Capital Acquisitions Tax Act 2003, covering the “support, maintenance and education” of children. The suspicion is that support no longer available under section 82 is now being redirected to dwelling house relief.

If they have strong grounds to suspect the tax exemption on dwelling houses is being similarly abused, I would expect them to push hard for reform.

Still, the relief is a valuable element of social policy to ensure that family members living with, and often caring for, elderly parents are not effectively forced into homelessness by inheritance tax charges on the death of those parents which forces them to sell the only home they know.

I think, as with the review of section 82, any reform will look to retain the relief for those people who have been genuinely living in the family home for the three years prior to any inheritance with an aged or infirm parent and who subsequently remain in the home (or replacement accommodation) for six years thereafter.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice