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