Bumper interest rates on savings accounts can't last – it's time to fix a good rate, writes FIONA REDDAN

IF IT WERE POSSIBLE for a €70 billion bailout to have a silver lining, it could be the fact that savers have been enjoying a bonanza since the banking crisis kicked off three years ago.

While European interest rates have been lingering around the 1 per cent level for some time now, the ECB rates rose to 1.5 per cent last week, Irish savers have been able to get rates of more than 3 per cent. But, as the banking crisis looks to be coming to some sort of a conclusion (hopefully) those sitting on lump sums or looking to start a regular savings habit should act quickly to lock in to the best rates.

Once banks are fully recapitalised, attention will turn once more to their bread and butter business – savings and loans – and given the level of bank losses on our lovely tracker mortgages, paying out above market rate on deposits will no longer be sustainable.

Last month, Bank of Ireland chief executive Richie Boucher sounded a warning when he said that “it is going to be impossible to maintain deposit pricing”. So, once the banks finally find themselves back on terra firma, consumers can wave goodbye to good rates.

Another problem will be the lack of choice as some of of the institutions with the best rates have left the market.

Last year, Halifax/Bank of Scotland fled while both Anglo Irish Bank and Irish Nationwide are out of the market. Both banks are now in wind-down and have sold on their deposit books to AIB and Irish Life Permanent.

The future of Irish Life Permanent is also uncertain, as it looks for a buyer for its insurance business. Its banking arm may yet be merged with another institution. And, while EBS is to be run as a standalone business once it merges with AIB in July, in the long term its future is unclear.

So, while the outlook for banking customers does not look great, there is still a window of opportunity to lock in to a decent rate. If you have a lump sum to invest, or you want to start a regular savings account, now is the time. With inflation running at 2.7 per cent in the year to May, to get a real return on your money you will need to look at products that beat this.

The best rates are available to those willing to fix, and typically the longer you lock in for, the better the return. However, the best rates also require significant lump sums.

Last Friday, EBS announced details of a rate for regular savers which is only available until the start of August. The EBS Family Savings account offers a market-leading rate of 5 per cent gross for people who open an account between now and August 5th. It is available to those that deposit €100-€1,000 a month, by direct debit. It has a minimum opening balance of €1, up to a maximum of €1,000. Depositors can make up to two withdrawals a year and in year two, the then prevailing re-investment rate on EBS’s 12-month fixed-term savings account will be offered.

The same instutution is paying 3.8 per cent on savings of more than €20,000 for a 12-month fixed term, while Ulster Bank has a 3.7 per cent offer on savings of €15,000 or over, Bank of Ireland offers 3.7 per cent on amounts of €10,000-€500,000. At Nationwide, you can get 3.65 per cent, for a deposit of €3,000.

For those looking to the longer term, Rabodirect has a 10-year fixed product, offering a gross return of 42 per cent (4.2 per cent AER). Remember, when opting for a fixed-saving option that if you need access during the term of the investment, you may be charged a penalty fee in order to so.

For example, if you look to withdraw your funds from Nationwide before the end of its 12-month term, a 90-day interest charge will apply. At Bank of Ireland, withdrawals will see its 3.7 per cent fixed account revert back to the 1 per cent default rate.

If you are not in a position to lock away your funds, Nationwide has an easy access account with a 3 per cent rate on savings of €2,000-€2 million, while National Irish Bank pays the same rate on amounts of between €1-€100,000. However, if you make a withdrawal the interest drops to 1 per cent that month.

If you’re opting for a regular savings account, remember that after 12 months the lump sum which you have built up over the year is typically shunted into a general savings account, which pays out far less in interest.

If security is a concern, remember that under the Deposit Protection Scheme, which is a permanent fixture, your savings of up to €100,000 are guaranteed in most of the institutions offering deposits in Ireland.

According to the Department of Finance, as both EBS and AIB will have banking licenses following their merger, savers will be protected by up to €100,000 in either institution, or €200,000 in both.

However, if you would rather spread your risk on the basis that the government could not meet all its obligations in the event of a default – a once unthinkable event – you could look to a foreign institutions, such as UK building society Nationwide, Northern Rock or Rabodirect.

These operate in Ireland under EU rules but are regulated in their home countries, and are therefore covered by these countries compensation schemes.

For example, deposits in UK institutions are covered up to £85,000 (€94,575) per person, while Dutch bank Rabodirect offers compensation of up to €100,000 per person. Savers in National Irish Bank, which is owned by the Danish institution, Danske bank, are covered by up to €100,000.

Finally, remember that Deposit Interest Retention Tax (DIRT) has been increased from 25 per cent to 27 per cent, which can eat into your savings. A return of 10 per cent is actually closer to 7 per cent when you have to pay tax on interest earned.

For a tax-free option, An Post still has some decent offers, such as its Savings Certificates, which pay out 21 per cent (3.53 per cent AER) after five and a half years. For a shorter term, Savings Bonds pay out 10 per cent (AER 3.23 per cent AER) after three years – and the minimum investment required is €100.

Remember, if you’re going to turn 65 this year and are entitled to pay no DIRT, contact your local Revenue Commissioners’ office to apply for an exemption.

If you have a lump sum to invest, or you want to start a regular savings account, now is the time