People in Ireland love a savings account. From rainy-day funds to “just in case” money, we keep sizeable sums sitting in easy-access deposit accounts paying us nothing. It can feel safe and responsible to have cash to hand, but with inflation eating into your buying power and higher returns elsewhere, the habit of over-saving may be quietly costing you thousands.
Saving mania
Household deposits with banks increased by €1.3 billion to a record €167 billion during July. Lodgements to on-demand or current accounts accounted for the bulk of the money, according to Central Bank figures.
We prize having money to hand more than growing it, it seems. Even when banks, in response to European Central Bank rate increases in recent years, raised savings rates to as much as 3 per cent, we still didn’t all move our money into better paying term deposit accounts.
The overall net wealth of Irish households has more than doubled in the last decade, but we hold around 38 per cent of our financial assets in cash and bank deposits, according to Central Bank data published this month. This is higher than the EU average of 30 per cent.
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One in five adults saves more than €125 a month and one in 10 is saving more than €500 a month, according to AIB figures published in July.
Building a financial safety net, renovating our homes, supporting children and saving for a holiday of a lifetime – these are our main medium to long term savings goals, according to the AIB data.
Savings amounts vary significantly by age. Among those with savings accounts, younger adults aged 18 to 34 are most likely to have modest savings, with 45 per cent holding less than €5,000, according to a Banking & Payments Federation Ireland (BPFI) survey published in December.
In contrast, 43 per cent of 55 to 64 year-olds and those 65 or over report having more than €10,000 saved.
Yes, we’re great little savers, and saving is better than borrowing, but saving alone isn’t enough.
Fewer than half (44 per cent) hold any type of investment, according to the BPFI survey.
“Most savers are prioritising short to midterm financial needs, such as saving for a rainy day or short-term expenses like holidays, over long-term planning, such as retirement or future income,” said the BPFI’s Brian Hayes.
With more than half of respondents (56 per cent) not having any investments, the results indicate that “there is potential to increase the number of people investing”, he said.
Saving in itself isn’t enough to grow your money or assure your future – that’s all of a sudden the message, loud and clear, from the regulator and the banks themselves.
Our participation in capital markets-based investments is low, and many are “not adequately providing for their long-term future”, according to the Central Bank report.
A perceived lack of money; fear and lack of trust; lack of knowledge about investing and lack of support and advice are the main barriers to investing, it said.
Emergency funds
An emergency fund, as well as a buffer for upcoming costs is a good idea if you can afford to save it, but keep any more than that on deposit and your money is eroding in real terms, says Sinead Cullen, co-founder of financial planners, LifeCraft.
“Inflation means every euro sitting in a low-interest account quietly shrinks,” says Cullen.
It’s smart to keep three to six months of essential expenses like housing and living costs in an accessible deposit account if you can, or 12 months expenses if your income is variable, says Cullen.
Saving money for things like car and home repairs, school fees or car loan balloon payments means you avoid high interest borrowing too.
Use a reasonably accessible deposit account for this, but be sure to shop around for value – ideally you want instant access, no penalties, and the highest interest possible. Use a savings account comparison tool like the one on CCPC.ie to find the highest interest accounts.
Keep a lump sum of up to €100,000 on deposit with Raisin bank, for example, and you’ll earn a market-leading 3.1 per cent on their fixed rate over three months, with instant access to your money.
You could then move your money to a MoCo Easy Saver account − it offers a 2.1 per cent variable rate on deposits. For example, a €50,000 deposit could earn you gross interest of €1,050 over a year.
With both of these banks, your deposits are guaranteed up to €100,000. With Raisin and Bunq, no tax on interest earned is taken at source, so it must be declared to Revenue in your tax return. MoCo, like the pillar banks here, sorts the DIRT for you.
Keep €50,000 on deposit with EBS and AIB and their 0.25 per cent variable interest rate means you will earn gross interest of just €125 in the year.
Keep the same amount in Bank of Ireland where the rate is 0.10 per cent and you’ll earn just €50 gross interest in a year.
So, there’s a difference of more than €1,000 a year in gross interest you can earn, depending on the bank you choose.
If your lifestyle means you have higher outgoings, you might be keeping a larger emergency and buffer fund. Don’t overlook the fact your deposits are only protected to €100,000 per person, per institution, says Cullen.
“Once you exceed that you are exposed,” she says. With more non-Irish banks now in the Irish market, often offering higher deposit rates, spreading the cash across regulated institutions makes sense, but it still doesn’t protect your long-term purchasing power.”
Medium to long term savings
If you’ve got money in a bank, and your intention is not to use it in less than three years, it’s probably in the wrong place, says Nick Charalambous of Alpha Wealth.
For goals with a six-year horizon or more, bank deposit accounts aren’t the best option. For your children’s education, for example, investing can be the way to go.
Ireland, however, has among the lowest levels of direct participation in the financial markets through listed equity, debt securities and investment funds, according to the Central Bank research.
Investing is something for an exclusive few, not accessible to everyone, and is the preserve of wealthier cohorts according to the data.
A significant barrier to would-be investors in Ireland, however, is tax and administration, says Cullen.
Take an exchange-traded fund (ETF), for example. This is a type of pre-packaged investment fund that holds a collection of assets such as stocks, bonds, or commodities. When you invest in ETFs, you’re spreading your money across various assets, which can reduce risk compared to investing in just one company or asset.
You can buy or sell an ETF on the stock exchange, similar to a single stock. You do this through an online trading platform or a stockbroker. Returns can be estimated at between 5 per cent to 9 per cent or more, so potentially much greater returns than keeping your money in a savings account.
Irish investors, however, face an exit tax regime.
There’s 41 per cent tax on gains, falling to 38 per cent from January. There’s deemed disposal, too – this is where after holding an ETF for eight years, you’re considered to have sold it for tax purposes, even if you haven’t. You must pay tax on any gains accumulated up to that point, which can reduce the benefits of long-term investment growth. You have to take personal responsibility to calculate and file tax correctly.
“For someone who wants to just invest a bit every month and not worry about it, this is not a trivial burden,” says Cullen.
People in Ireland shy away from direct investing, favouring instead indirect participation in capital markets, including via pensions, which in Ireland is above the EU average, according to the Central Bank data.
Indeed, generous tax incentives, especially for higher earners, make putting money into your pension a great choice, depending on your savings goals. And you can access some pensions at age 50.
If investing directly in the markets feels too scary, products from the likes of Zurich, Aviva and Irish Life can offer simpler investing options for many. An investment time frame of five years-plus is recommended and providers estimate potential annualised returns of 6-7 per cent a year – again, more than a bank account.
The minimum monthly savings amount tends to be €100, but you can save more. You can also start with a lump sum, says Nick Charalambous.
These investment policies offer access to diversified funds, including index tracking options, automatic tax calculation and deduction by the provider, says Cullen.
“These products can be suitable for households that don’t want Revenue paperwork landing on their desk,” says Cullen.
Fees for the same product, however, can vary widely by broker and can eat into your returns, so shop around and get the fees in writing. The allocation rate is the percentage of your money left that is invested after the charges have been taken out of it.
“Ask if there is an entry cost,” says Charalambous. “If you are putting in €100 a month, or a lump sum of €1,000 or more, how much of that money is actually going into the savings account. The ideal is to get all of that invested, that’s called the allocation rate.”
The Government charges a 1 per cent levy on these savings products. Ask if this is covered by the broker, he says.
“Even if you have all of your money allocated and the Government takes 1 per cent, you’ve already lost 1 per cent of your investment contribution. That can be covered by the broker because they get paid relatively attractive fees [for selling] these products.”
Compare broker management charges too, he says. “As a general rule of thumb for me, you should be looking at a management charge of about 1 per cent per annum for a lump-sum investment. For monthly contributions where you pay in €100 a month, for example, it would be about 1.25 per cent.”
It can be as much as 1.5 per cent or 2 per cent.
“That may sound small, but extrapolated over time as the fund grows – and it’s on the value of the fund, not of the contribution, and it’s taken daily – it can amount to a very big difference,” he says.
At the moment you will pay 38 per cent tax on any gains when you exit the investment.
Behaviour gap
Ireland’s preference for deposit accounts over investing isn’t about personal failings, says Cullen.
“It’s about a system that has made investing feel intimidating, inaccessible and unnecessarily complicated,” she says.
“Saving is responsible, but it’s not enough any more. Most households need a blend of deposits for security, and diversified investments for growth.”
For people in Sweden and Australia, for example, growing your wealth by investing is far more common. This has been driven by better tax measures and incentives and financial education in those countries, according to the Central Bank research.
By saving, too many Irish households are doing the right thing in theory, but they are falling behind in practice, says Cullen.
If you’re keeping all your money in a bank, talk to a financial advisor. They can advise the level of risk you need to take to prevent your money from losing value, and the level of risk you can afford to take for it to increase in value. Too much money on deposit when there is growth to be had elsewhere can be recklessly cautious.
