What next for savings once guarantee scheme ends?


PERSONAL SAVINGS:The Government guarantee scheme which was set up to protect the savings deposits held in Irish banks is set to expire ina  few months time - so what are the implications for savers, asks FIONA REDDEN

SAVERS HAVE enjoyed a pretty easy ride for the past 18 months. Since that fateful night in September 2008 when the Government stepped in to guarantee all the deposits of Irish banks, they have been able to relax in the knowledge that their nest eggs were secure – or at least as secure as the State.

On top of this, savers have also been benefiting from inflated deposit rates as banks sought to boost their loan-to-deposit ratios. Now, however, with the Government guarantee set to end and turmoil in Greece leading some to question the stability of the euro currency, the outlook looks somewhat less certain. As a result, savers are getting jittery – but do such risks actually pose a credible threat to your lump sum? The worst possible situation for savers would be if Ireland moved out of the euro. As the problems faced by Greece continue to dominate the headlines, leading economists all over Europe are talking of “contagion”, and the possibility of Greece’s difficulties spreading to the rest of the “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) countries.

In fact, some are going so far as to say that Ireland may face a situation similar to that of Argentina in 2002, whereby we might wake up one morning to find that Ireland has pulled out of the euro and the punt has been devalued by 50 per cent against the euro, leaving our savings halved in value.

Such a doomsday scenario is, however, deemed “very unlikely”, by Austin Hughes, chief economist with IIB Bank. While he acknowledges that the lessons of last year taught us that unimaginable events can occur, the reality, he says, is that “the risks in terms of the Irish system are very small”.

“Savers have to be cautious, but it would be wrong if people panic in these circumstances”.

For Hughes, the danger is that people will decide to worry about the worst-case scenario, and thereby run into all sorts of other risks by taking their money out of Irish banks.

Indeed for the past 18 months, Irish banks have been some of the safest places in the world to invest your money, given the blanket Government guarantee. Come September 30th however, the unlimited guarantee of deposits is due to expire in the following institutions: Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and the EBS.

From this date on, savers will be protected under the Deposit Protection Scheme (DPS), for up to €100,000 of their deposits – or €200,000 per couple – per institution, unless the Government decides to further extend the guarantee. Savers in international banks such as ACC Bank and Ulster Bank are also be protected under this scheme, while others, such as Investec and Rabodirect, are covered under their countries’ respective guarantee schemes.

Gerard Sheehy, financial advisor with investandsave.ie, is doubtful as to whether or not the full guarantee will be extended.

“Its function was to avoid a run on deposits in the covered institutions. That fear should now be somewhat allayed by the increase in limits of the Deposit Protection Scheme,” he says.

“The guarantee has had the effect of distorting the deposit savings market in favour of pet institutions and I doubt that the EU Competition Authority would be in favour of prolonging the inevitable ‘stand on your own two feet’ day,” he adds.

Nonetheless the Government has already extended one element of the guarantee, for fixed-term deposits. Under the Eligible Liabilities Guarantee Scheme (ELG), which was introduced last December, term deposits in qualifying institutions, which are the same as those granted the original guarantee, are protected in full for up to five years. However, to qualify for the ELG, the deposit must be placed with the institution after it has joined the scheme – but before September 29th, 2010. Most of the qualifying institutions joined the scheme in January, with EBS and Irish Nationwide both signing up in early February.

So, if you have €150,000 which you wish to place on deposit and be protected by virtue of a Government guarantee, then there is a window of opportunity to lock such funds into a fixed-term product. Remember, the guarantee will last until the deposit matures or September 29th, 2015, whichever is earlier.

Savers are also concerned about the prospects for the beleagured Irish Nationwide and Anglo Irish Bank. Both institutions are currently offering some of the best deposit rates in the market – 3.2 per cent at Anglo Irish Bank for its easy access reward account, and 3.25 per cent at Irish Nationwide for its instant access account. If in doubt, and if you have more than €100,000 to place on deposit, you could consider spreading your funds in various institutions, thereby ensuring that all your savings are covered under the DPS.

Savers have also been presented with another opportunity through the launch of the National Solidarity Bond, a State-led scheme aimed at helping to fund the capital investment programme. The bond, in which investors can save between €500 and €250,000, is available in An Post outlets and pays interest of 1 per cent a year, plus a tax-free bonus of 40 per cent if you leave your money in for the full term, meaning the after-tax return is 3.96 per cent a year.

Given that it is a State-run scheme, investors’ funds should be safe, as the bond is 100 per cent secured by the Government. However, the main risk to savers’ investments comes from the term of the product – if you don’t stick with it for the full 10 years you won’t earn the full return.

As such, financial advisors are suggesting that the returns on offer through An Post savings bonds may be more attractive, given that you have to lock-in for a shorter period. For example, its 5.5 year savings certificate offers a total tax-free return of 21 per cent over that period. All An Post savings certificates and savings bonds are covered by a long-standing absolute State guarantee.

For those with their money in investment funds, the Investor Compensation Scheme offers some peace of mind. However, as Sheehy points out, the limits are low – although 90 per cent of the amount lost, in the case of default, will be returned to the investor, it is subject to a maximum of €20,000.

Moreover, the scheme only applies to investment intermediaries, and does not cover life assurance firms. With the on-going uncertainty at Quinn Life, this is leading some to worry about the security of their investments. However, the insurer is quick to point out that Quinn Life is not part of the administration process put in place by the Financial Regulator, and is fully in compliance with the required solvency margins.

For additional comfort, Sheehy advises that when investing money, you should request confirmation of the relevant solvency margins, credit ratings and financial strength from the investment companies in which you are placing your funds.

Hughes agrees. “Savers have to be more conscious of where their money is and aware of the circumstances in which they invest. They must do a little more homework,” he says.