Saving grace of deposit accounts

Many savers are prioritising security over interest rates when choosing a home for their money. They should take advantage of the fact that switching deposit accounts is a straightforward process, writes Caroline Madden

IN LIGHT of the ongoing turmoil in the banking sector – from the nationalisation of Anglo Irish Bank to the announcement on Monday that First Active is to merge with Ulster Bank into a single entity – it’s hardly surprising that savers have become increasingly jittery about the security of their money. But are they right to be nervous, or are their fears unfounded and their savings safe?

It’s clear that many savers are now prioritising security over interest rates when choosing a home for their money. According to a survey recently commissioned by Postbank, deposit security is the main concern for 43 per cent of all savers, and it increases in importance for those over 55.

This compares to 31 per cent of savers for whom the interest rate on offer was the key factor in deciding where to keep their money.

Harry Slowey, a director at www.irishdeposits.ie, has also noticed that savers are increasingly concerned about whether or not their money is secure. “Over the last six months, it would be a question that is increasingly asked,” he notes. “I’m not saying that they’re not interested in return, but the relative weighting of return against risk has certainly moved in the last six months.”

While it is perfectly understandable that savers are concerned about issues of risk and security, they should remember that guarantees are in place to safeguard their savings.

In September, the Government guaranteed all savings held by depositors in the seven Irish banks and building societies – AIB, Bank of Ireland, Anglo Irish Bank, Irish Life Permanent, EBS, Irish Nationwide Building Society and Post Bank. The guarantee covers the original capital sum deposited and any interest that has since accrued. This is known as the Government bank guarantee scheme, and it will be in place until September 29th, 2010.

The only threat to deposits in Irish banks would be if the State itself were to default on its borrowings and, despite our escalating economic problems, there is no suggestion of this happening. If one of the banks should close, the only headache would be the inevitable bureaucracy of making a claim under the guarantee.

Anglo Irish Bank may have suffered a spectacular fall from grace, but its nationalisation on January 15th in no way undermines the State guarantee. In fact, deposits and savings are further safeguarded by the nationalisation. Anglo customers can get further information relating to the nationalisation on the Department of Finance website (www.finance.gov.ie) and on Anglo’s own site (www.angloirishbank.ie).

In relation to other Irish financial institutions, the Post Office is a State body, so the Government has always guaranteed all deposits there.

As for credit unions, deposits up to a maximum of €100,000 per person are covered by the Irish Deposit Protection Scheme (which is separate to, and pre-dates, the Government bank guarantee scheme).

The Deposit Protection Scheme covers all financial institutions (and their subsidiaries) that are authorised by the financial regulator to operate here, which accounts for the majority of high-street institutions. The scheme encompasses many foreign institutions, including Bank of Scotland (Ireland), Ulster Bank, ACCBank and KBC Bank. Under the scheme, if you have deposits with more than one institution, you are entitled to claim up to €100,000 per institution.

Some banks operating in Ireland are regulated in their home country. Deposits with these institutions are covered by guarantees and compensation schemes in their own jurisdiction, and terms of these schemes vary.

Rabobank, for example, is covered by the Dutch Central Bank for 100 per cent of the first €100,000 per person, while deposits with Northern Rock (which was nationalised last year) are guaranteed by the Bank of England and HM Treasury, regardless of the amount deposited. This guarantee arrangement will remain in place during the period of temporary public ownership, and the British government confirmed that the guarantee will not be withdrawn without at least three months’ notice.

Investec Ireland and Leeds Building Society are both covered under the British Financial Services Authority compensation scheme, which guarantees 100 per cent of the first £50,000 (€54,700) per person. National Irish Bank’s deposit customers are now 100 per cent covered (regardless of the amount) by the new Danish government guarantee scheme (similar to the Irish Government guarantee scheme) for the next two years.

A summary of the level of protection available for deposits, broken down by institution, is available on the Financial Regulator’s consumer website (www.itsyourmoney.ie). Details of the exact operation of the Irish Deposit Protection Scheme are also available there.

On Monday, it emerged that First Active will cease to exist as a separate entity and will merge with Ulster Bank to create a single bank. However, it doesn’t appear that the merger should be a cause of concern for its savers.

First Active customers, including those with deposits at the bank, will be transferred to Ulster Bank and the same terms, conditions and rates will apply, and deposits of up to €100,000 will still be guaranteed under the Deposit Protection Scheme.

A relatively new phenomenon that Slowey has seen emerging in the savings market is that people are starting to spread their money across a number of different banks. “If you go back 18 months, people were happy enough with one bank,” he says. “Now what you’re finding is people are starting to be much more conscious of spreading their money around, and so the market has become much more mobile.”

For savers with Irish banks this seems like an unnecessary effort, as 100 per cent of their savings are covered by a cast-iron sovereign guarantee, regardless of whether the money is with just one Irish bank or spread among several.

However, there may be circumstances where this strategy is logical, for example if an individual is saving with an institution that is not covered by the Irish Government guarantee scheme, and their savings exceed the relevant compensation limit or guarantee that applies to that particular institution.

The good news is that switching a deposit account from one institution to another is a straightforward process, and is generally less cumbersome than switching current accounts which can have direct debit instructions attached. “It’s a much easier process to effect,” says Slowey. “It’s not a big effort, and people, once they do it once, become much more aware of it.”

Savers should take advantage of the fact that switching deposit accounts is a relatively smooth, hassle-free process in order to chase the best interest rates on the markets (see accompanying panel for more detail on rates).

What level of protection is there for my deposits?

According to the Financial Regulator, the levels of protection in place are as follows:

Financial institutions covered by Irish Government guarantee scheme:

AIBDeposits are 100 per cent covered by Irish Government scheme

Anglo Irish BankDeposits are 100 per cent covered by the scheme

Bank of IrelandDeposits are 100 per cent covered by the scheme

EBS Building SocietyDeposits are 100 per cent covered by the scheme

Irish Life & PermanentDeposits are 100 per cent covered by the scheme

Irish NationwideDeposits are 100 per cent covered by the scheme

Post BankDeposits are 100 per cent covered by the scheme

(Subsidiaries of these institutions are also covered.)

Other Irish deposit-takers:

Post OfficeIrish Government guarantees all deposits

Credit unionsDeposits up to maximum of €100,000 covered by Irish Deposit Protection Scheme

Foreign-owned institutions covered by Irish Deposit Protection Scheme:

ACC BankDeposits up to maximum of €100,000 covered by Irish Deposit Protection Scheme

HalifaxDeposits up to maximum of €100,000 covered by Irish Deposit Protection Scheme

National Irish BankDanish scheme covers up to DKK300,000 (approx €40,000). Irish Deposit Protection Scheme covers the balance up to a maximum of €100,000. In addition, National Irish Bank (a subsidiary of Dankse Bank) deposit customers are now 100 per cent covered by the Danish Government Guarantee Scheme until September 30th, 2010.

Ulster Bank/First ActiveDeposits up to maximum of €100,000 covered by Irish Deposit Protection Scheme

KBC BankDeposits up to a maximum of €100,000 covered by Irish Deposit Protection Scheme

Pfizer Int'l BankDeposits up to a maximum of €100,000 covered by Irish Deposit Protection Scheme

(There are other banks covered by the Irish Deposit Protection Scheme. A full list is available on the Financial Regulator's website www.itsyourmoney.ie)

Banks covered by schemes in other countries:

Investec Bank(UK) 100 per cent of the first £50,000 per person is covered by the UK Financial Services Compensation Scheme (www.fscs.org.uk); Leeds Building Society100 per cent of the first £50,000 per person is covered by the UK Financial Services Compensation Scheme; Northern Rock All deposits held with Northern Rockare guaranteed by the Bank of England and HM Treasury, regardless of amount; RaboDirect100 per cent of the first €100,000 per person is covered by Dutch Deposit Guarantee Scheme.

Rates: what the changes mean

SINCE LAST October the European Central Bank (ECB) interest rate has been slashed from 4.25 per cent to 2 per cent. While this is cause for celebration for mortgage holders, the flip side is that savers are no longer getting the same bang for their buck.

"Savings rates have come down by and large across the board," says Harry Slowey, director of www.irishdeposits.ie. However, because there is such a strong demand among banks for deposits, the rates on offer are still at a "reasonable premium" to the ECB base rate.

"If you went back two years ago, banks had alternative sources of finance, from securitisation to capital markets," he says. "Given what's happened in the last two years, they've shown a vulnerability in those funding lines and banks are increasingly looking to grow their deposit base." Therefore competition for deposits is buoying up rates to an extent.

However, customers need to keep their eyes open. Quite often, an institution will offer a range of savings accounts – each with their own interest rate. Often, the default account will carry a negligible rate; customers will have to proactively ask for their money to be channelled into a higher rate option.

Until Wednesday, Anglo had been offering a variable rate of 8 per cent AER (annual equivalent rate) on its regular annual saver account. Regular savings accounts are used by people who want to build up savings by lodging regular amounts each week or month. However, Anglo cut this rate to 7.3 per cent.

Since nationalisation, market commentators have been speculating that it was only a matter of time before Anglo would have to reduce its high savings rates, so this comes as no surprise. Despite this, its rate still tops the regular savings market, although other banks are offering attractive rates of between 5 and 7 per cent.

In relation to deposit accounts, where the saver deposits a lump sum, Anglo is also the market leader, offering a rate of 5.5 per cent AER on amounts of up to €100,000.

Given that the ECB rate may fall, savers could see further rate cuts in the months ahead. "On the basis that rates are probably going to fall further, people should be considering locking in their rates if they can," he says.

Investec is offering a fixed rate of 5.5 per cent for a term of six months on a minimum deposit of €20,000. Savers who are willing to fix for longer may be attracted by Anglo's 5.25 per cent on its one-year fixed-term account. The minimum deposit is €1,000. However, before opting for a fixed rate, savers must weigh up whether or not they can afford to lock their money away for a set amount of time, Slowey says. Savers should check whether they would be able to extract their money in an emergency and what the penalty would be.

- Caroline Madden