The desert arrives!
The landscape for savers these days resembles an encroaching desert with fewer and fewer options for growth. Low returns and high taxes are demolishing potential earnings. But all is not lost. For those lucky enough to have some extra cash to put aside, there is life beyond the banks and local deposit takers.
But before abandoning the bank next door, we should take a moment to examine just where one can still earn some semblance of a return.
Regular saver accounts
Based on saving €100 per month, a number of banks compete in this space. KBC Bank, EBS and Nationwide UK (Ireland) are top of the list with a 3% AER / 3% gross variable offer. All three offer the 3% deal on regular saver amounts of between €100 and €1,000 per month. KBC and Nationwide UK also offer instant access on both accounts while EBS has some restricted access.
Lump Sum accounts
Your options flip when it comes to lump sum deposits. Based on a €2,000 deposit, the 10 Year National Solidarity Bond offers the best rate of return with 2.26% AER (25% Gross over the term). The 5.5 Year Savings Certificate from State Savings will pay you 1.24% AER (or 7% Gross). EBS comes in third with its Sure Certificate 4 Year Fixed Return which pays 1.05% AER (4.27% Gross).
If you can increase the lump sum deposit to €5,000, Bank of Ireland comes in with a competitive 1.60% AER / 11.16% gross and a 1.45% AER / 8.67% gross with their 7 and 6-year growth account. They also offer a competitive 5-year 1.3% / 6.48% gross. These Bank of Ireland offers all beat the State 5.5 Savings Certificate but are beaten by the State 10 year National Solidarity Bond.
A big advantage of various State Savings options are the D.I.R.T-free features. However, if you want to claim the best value from the State Savings options, you MUST leave the money in the account. If you don’t or feel you can’t, you might want to look at some other options. For example, on the 10 Year National Solidarity Bond, there is a tax-free bonus of 25% after 10 years. You can access your money at any time by giving 7 days notice. An early encashment bonus after 5 years means you receive 6% and after 7 years you receive 13% – not the full amount! Also, not all State Savings options are completely DIRT exempt. There is a combination of bonus and regular interest, which of course attract DIRT so you need to clearly understand this before you sign up across for State Savings options.
The State Savings options are widely available through An Post. All of the other providers offer a mix of direct service through their local branch network or independent financial advisers (you need to confirm if your financial adviser has an agency).
Taking a more serious look at growing your money
If you really want to grow your money these days, everyday savings accounts are not ideal. Sure, they offer all levels of instant access and state protection (under the Deposit Guarantee Scheme), but when it comes to growing your hard earned cash, you really do need to move beyond the local savings institution.
Take their cash and make it your cash!
There are loads of options to take generous tax relief for long-term savings (a.k.a. a retirement account or a pension). To begin with, the State gives you back your tax by way of tax relief, up to 40% for higher income earners. In other words, for every €100 you put away, the State gives you an extra €40. Think of it as an instant 40% return.
If you are lucky enough to work for an employer that offers a ‘match’ on your pension contributions, take it! This means for every €100 you put aside into a pension, your employer will also put in money, it might be €100 and it might be less. That will depend on the employer. But if they offer any ‘match’, it’s more free money in your account!
Even if you work for an employer that currently makes no pension arrangement for its employees, you can still access the State tax-relief and employers must assist you in this. So at a minimum, grab the State tax-relief because you would be mad not to!
And talking of growth, retirement accounts grow tax-free and you can even grab tax-free cash of 25% or up to €200,000 on retirement.
Watch the fees
Successful long-term savings requires a level of financial dexterity. Negotiating lower fees and management charges (and knowing where they are hidden) will result in savings growing faster.
An investment option called ‘passive investing’ provides savers and investors a proven way to grow their money faster. It avoids old-fashioned high fees and even hidden fees which can have a devastating impact on personal savings. It might sound a bit technical but there are innovative financial advisers in Ireland that provide this service. It’s a best in class investment philosophy that ensures personal savings grow faster. Customers are given their own account which they can log onto. Their savings and investments are even placed in their account (and it is not ‘pooled’). This means that the individual saver has more visibility and more control; their cash is not sitting in some black hole where they hope for the best. There are also some really good access and cash-out options where expensive exit penalties are avoided.
Take that Mr. Draghi!
As Mario Draghi and his team at the European Central Bank make savers persona non grata, all is not lost for savers (and investors also). There are still options available. EBS, KBC, Nationwide UK and State Savings offer some of the best deals in more traditional savings options (be they regular savers or lump sum).
More innovative savings and investment options are becoming available. For example, if you select the right investment strategy, you could grow your long-term earnings significantly (by hundreds of thousands of Euro) simply be being tougher on the fees your investment adviser charges. But before you begin to negotiate, you must understand the system and how to uncover the hidden fees. When you do this, you will be onto a winner!
Frank Conway is founder of MoneyWhizz.org, the financial literacy initiative.