As discussed last week, despite rising interest rates at a European level, deposit rates remain stubbornly low in Ireland. Unless you’re willing to put your money away in a State savings vehicle, the best return is likely to be the 0.25 per cent available from AIB at the end of the month.
Given that inflation hasn’t slowed down just yet – the Irish rate stood at about 9.5 per cent in October – such low rates of return look remarkably out of whack.
It’s a difficult situation for all those savers who are now losing money on a real basis. For many, the only option is to “grin and bear it”, says Jonathan Sheahan of Compass Private Wealth, given that moving money out of deposits brings risks with it.
“Anything other than cash, you are putting your capital at risk to varying degrees,” he says, “The risk for people is chasing yield.”
So if you’re not one of those willing to take on more risk, what can you do?
With interest rates recently touching 3 per cent in the UK, a visit across the Border might pay dividends. AIB NI, for example, is currently offering a rate of 0.6 per cent on amounts up to £100,000, or 2.5 per cent on its regular saving offering.
You can currently earn as much as 2.56 per cent on deposits of up to €100,000 with Latvian bank BluOr, or 2.55 per cent with Portuguese bank Banco Portugues de Gestao
Of course, doing so brings risk of another kind entirely: currency risk. You’re effectively betting that sterling will not lose value against the euro. And while this might bring an even greater return, it’s not a risk most savers would be willing to take.
Another option could be a pan-European savings option such as that offered by Raisin Bank, the German bank, which operates a pan-European deposits platform. You can currently earn as much as 2.56 per cent on deposits of up to €100,000 with Latvian bank BluOr, or 2.55 per cent with Portuguese bank Banco Portugues de Gestao.
Both are protected by local deposit schemes, at up to €100,000 per customer.
But beware the small print; with the BluOr offering for example, Latvian withholding tax of 20 per cent applies to the interest earned, while in the case of the Portuguese offering, a similar tax of 28 per cent applies.
This means that in the case of a deposit rate of 2.56 per cent, savings of €50,000 will generate a return of €1,280 a year. Once the Latvian rate is applied however, this falls to €1,024.
But this can be lowered.
First of all, according to Monica Pina Alzugaray, country manager for Raisin in Spain and Ireland, the Latvian tax can be reduced to 10 per cent once a tax residence certificate (letter of residence, which can be requested by via ROS or myAccount) issued by Revenue is provided. This would increase the deposit return to €1,152 in the above example.
With regard to Portugal, the tax rate can be cut to 15 per cent if a similar letter is provided, as well as the completion of the Portuguese form 21-RFI, which Raisin provides.
Secondly, you may be able to claim back any tax withheld on deposit interest earned from bank accounts located in the EU, or countries with which Ireland has a double taxation agreement, in a tax return. This is because, as the interest is paid to an Irish resident taxpayer, it is also taxable in Ireland under Dirt at a rate of 33 per cent. But such additional tax would mean that the income is subject to double taxation.
“Under the terms of the Ireland-Latvian DTA, however, the Irish resident taxpayer can claim a foreign tax credit for the Latvian tax paid on the income (10 per cent),” a spokeswoman for Revenue explains. So, while you may give up the 10 per cent tax at one end, you can claim it back via a tax return such as a Form 11.
If withholding tax can be avoided/refunded, the annual interest of €1,280 on the deposit with Latvia’s BluOr will give a net return of €858, given Dirt at a rate of 33 per cent.
Each country operates differently; Spain, for example, has a withholding rate of 19 per cent, but this can be reduced to zero if certain documentation is provided.
Finally, Revenue cautions that in certain circumstances, PRSI will also be chargeable on EU-sourced deposit interest.
Another option is a structured type of deposit, which can offer a better return with non-Irish based banks.
BCP, for example, currently has an offer for a three-year deposit with Société Générale, a French A-rated bank, paying 2.8 per cent fixed interest at the end of each year.
It also has a five-year euro deposit with Natwest Markets NV, the Dutch entity of the NatWest group (owner of Ulster Bank). This pays interest of 4 per cent at the end of years one to four, and 3 per cent at the end of year five (AER is 3.81 per cent).
Minimum investment for the SocGen offer is €50,000 for individuals, and €100,000 for NatWest, and both close for subscription on November 28th.
So what’s the catch?
Well, if you want to withdraw your money early, you could be hit with more than just a penalty charge. Your deposits are protected “at maturity” with the relevant banks, but the point of such products is to lock in for the full term. So, withdrawing earlier than the redemption date, means that “capital security will not apply to the portion of your investment being withdrawn”.
Rather, “withdrawal value may be more or less than the capital secure amount and you may lose some or all of the money you invest”. As BCP notes, “Investors should be comfortable with the full term before proceeding”.
Moreover, the deposits are not covered by the relevant deposit protection schemes. Dirt applies to any gains, and is not collected at source, so again, you’ll have to settle this through a tax return.
Pay down debt
If you are looking only at the Irish market, you’re earning – at best – about 0.25 per cent on regular savings. Saving €200 per month will earn you less than €6 a year.
While everyone needs a rainy-day fund in easily accessible cash – most financial advisers would recommend about six months of expenses, but everyone has a different comfort level – once you exceed this, you might need to think about getting a better return for your money.
‘A great way to generate ‘interest’ is to pay off high-interest loans,’ says Sheahan, noting that more expensive unsecured loans such as car loans or credit card debt should be first, followed by the mortgage
Sheahan suggests that in addition to a rainy day fund, you keep a cash buffer on hand, an “opportunity fund” that can be used to achieve certain goals – home renovation for example, or for investment. Money available on top of this, however, can be used to paid down debt.
“A great way to generate ‘interest’ is to pay off high-interest loans,” says Sheahan, noting that more expensive unsecured loans such as car loans or credit card debt should be first, followed by the mortgage.
With interest rates on the rise, many homeowners are looking at locking in for a longer fixed-rate term. But remember, if you do lock in for a fixed term, it doesn’t preclude you from over-paying your mortgage. Bank of Ireland allows 10 per cent of your normal monthly payment and Avant allows you to over-pay 10 per cent of the mortgage balance each year. AIB used to offer a similar facility but it is unclear if tit still does.
These savings can be significant; over-paying €200 a month for example, on a €100,000 mortgage with a 10-year term outstanding, can cut €3,176 off the interest bill, and two years off the term of the loan, thus saving about a further €22,000.
That means savings, then, of about €2,500 a year – a lot better than the aforementioned €6! Similarly, paying off a car loan or other personal loan early can also mean a lot of savings.
The downside of paying off debt early is that you no longer have access to that cash; however, the upside of saving such sums might compensate for this.
“You are giving up liquidity by paying down debt,” says Sheahan.
Another option might be to just hold tight and wait for circumstances to improve. Locking your money away now, when rates are so low, might not be the best move should rates start to increase over the coming year or so.
“You’re probably better off waiting in the expectation that deposit rates will naturally increase,” says Sheahan.
Investing in equities, either by purchasing shares directly or through a passive fund such as index tracking exchange-traded fund (ETF), is one way of boosting your returns. But it also poses far more risk than a typical deposit.
If you are looking for better returns, and are comfortable assuming the associated risk, Sheahan suggests an “averaging-in” approach to markets, whereby you allocate a certain amount each month, rather than investing a lump-sum straight away. This, he says, can smooth returns and reduce risk.