Tax-free State sav­ings worth con­sid­er­ing for large sums on de­posit

The Irish Times - Business - - FRONT PAGE - Fiona Red­dan

Not so long ago I got a call from a reader query­ing the lack of op­tions for sav­ing, and the low level of in­ter­est rates avail­able. He had well more than €1 mil­lion on de­posit and his re­tire­ment plan was to live off the in­ter­est. But with rates on the floor such a strat­egy was look­ing penu­ri­ous, with not much more than about €5,000 a year the best he could ex­pect.

Con­trast this with the €50,000-plus his cap­i­tal could gen­er­ate each year if he could achieve a 5 per cent in­ter­est rate and you quickly see how the bot­tom­ing out in in­ter­est rates is af­fect­ing ev­ery­one – even those with sig­nif­i­cant wealth. His con­cern is not as un­usual as you might think. Last month, the Cen­tral Bank pub­lished a re­port on house­hold wealth, and buried in it was a ta­ble giv­ing fig­ures on the lev­els of de­posits held by house­holds across the coun­try. It makes for sur­pris­ing read­ing, with Ir­ish house­holds now hold­ing record amounts on de­posit, at al­most €100 bil­lion, de­spite the dire re­turns on of­fer. Our pre-crash love of prop­erty has per­haps been re­placed for a de­sire to have cash on de­posit.

The fig­ures are for 2014 but the Cen­tral Bank says they have not changed much since. They show that there are more than two mil­lion house­hold ac­counts with sums of be­tween €2,000 and €100,000 on de­posit in Ire­land.

There are some 138,441 ac­counts with de­posits in ex­cess of €100,000 in them, and with the de­posit pro­tec­tion scheme cov­er­ing €100,000 per in­sti­tu­tion, you’d won­der how many of these are owned by in­di­vid­u­als spread­ing their risk by de­posit­ing up to the max­i­mum cov­ered by the scheme with var­i­ous in­sti­tu­tions.

And there are 1,776 house­hold ac­counts with more than €1 mil­lion on de­posit. That equates to more than €1.7 bil­lion on de­posit. So: what should savers do?

One op­tion is to con­sider the pan-Euro­pean mar­ket, as we fi­nally see the much-vaunted sin­gle mar­ket for fi­nan­cial ser­vices fi­nally start to trickle down to con­sumers. If Ir­ish banks won’t of­fer savers bet­ter rates, why not look some­where else? Raisin.com, a pan-Euro­pean sav­ings plat­form, which links up with Euro­pean banks (one of which is AIB, which of­fers a one-year de­posit rate of 0.5 per cent to Ger­man savers) to tar­get savers across the re­gion is still work­ing on get­ting ac­cess to the Ir­ish mar­ket.

If it was to get the nod from the Cen­tral Bank to op­er­ate here, it would al­low savers in Ire­land to lock into rates of as much as 1.64 per cent from banks such as Por­tu­gal’s At­lantico and J&T Banka of the Czech Repub­lic. Mal­tese bank FIMBank has also started of­fer­ing sav­ings ac­counts for cus­tomers on a pan-Euro­pean ba­sis, and will take your money pro­vided you al­ready have a bank ac­count with a credit in­sti­tu­tion within the Euro­pean Eco­nomic Area. It’s ramp­ing up its Ea­sisave prod­uct, which it launched in 2012, to tar­get savers through an on­line plat­form. This is po­ten­tially good news for Ir­ish savers.

Also good news are the rates it of­fers, at 1 per cent fixed for a year, or as much as 3 per cent an­nu­ally if you opt for its dol­lar sav­ings ac­count – or dou­ble what you could ex­pect from a bank in Ire­land. The bank says it can of­fer such rates be­cause it doesn’t have to sup­port an ex­pen­sive branch net­work.

Ir­ish de­positers will also be pro­tected by the Malta de­pos­i­tor com­pen­sa­tion scheme, which cov­ers up to €100,000 per de­pos­i­tor.

Is there a catch? Well, if you’re an Ir­ish saver and are so risk averse that you are keep­ing more than €1 mil­lion on de­posit, are you go­ing to feel com­fort­able putting your money into a for­eign bank you know lit­tle to noth­ing about? On Mon­day the Euro­pean Cen­tral Bank pulled the li­cence of an­other Mal­tese in­sti­tu­tion, Pi­la­tus Bank, af­ter it was ac­cused of pro­cess­ing cor­rupt pay­ments, while most savers here will re­call the run on North­ern Bank both in the UK and here. For a cau­tious Ir­ish saver, opt­ing for the pan-Euro­pean op­tion is not as sim­ple as it sounds.

State Sav­ings scheme

But there could be an­other so­lu­tion to the sav­ings co­nun­drum – the State. It al­ready of­fers tax-free sav­ings through the State Sav­ings scheme, but what about if it looked across the Ir­ish Sea to the ex­am­ple of the UK’s In­di­vid­ual Sav­ings Ac­counts (ISAs)?

Last year, the Fi­nan­cial Times de­scribed the ISA tax-free wrap­per as “still the best in­vest­ment af­ter nearly 20 years”, and it could have much to rec­om­mend here. It would widen de­posit in­ter­est re­ten­tion tax avoid­ance to a whole plethora of Ir­ish savers – not just those aged over 65 as at pre­sent – but, cru­cially, it could also help peo­ple look to ways of gen­er­at­ing an in­come other than de­posits, such as div­i­dend-pay­ing shares, or bonds.

If fear of los­ing their money is keep­ing savers tied to de­posits – even though the real value of the money may be fall­ing due to the im­pact of in­fla­tion – a tax-free ap­proach could help ease the switch to an al­ter­na­tive.

Ir­ish house­holds now hold record amounts on de­posit, at al­most €100 bil­lion

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