Don’t bank on a savings account to beat inflation

With a few exceptions, the interest rates on bank savings products are well below inflation – unless you’re willing to leave your money in the bank for the long term. Angelique Ardé reports

In aid of National Savings Month, we asked the big four banks to rate their best savings products for deposits of less than R10 000 and for deposits of more than R10 000. Their recommendations, along with the offerings of two smaller banks, show that it does not always pay to save at the bank.

It being Savings Month, you may have heard some of the banks making a fuss about certain savings products.

Absa recently launched the Depositor Plus account, which it described as “a true game-changer for savings across all income brackets”, while African Bank boasted about the “market-topping” interest rates on offer on its savings products.

The 9.5 percent that African Bank is offering is indeed a “markettopping” rate, and in this low-interestrate environment, the five percent that Absa is offering isn’t too shabby either. But how much money do you need to deposit and how long do you need to leave it in the bank to qualify for these rates? You’ll need R5 000 invested for five years in order to earn 9.5-percent interest a year at African Bank and you’ll need a cool R10 million to earn five percent at Absa.

As these examples show, the best

For deposits of under R10 000: Arrie Rautenbach, the head of retail banking at Absa, recommends the bank’s recently launched Notice Select account. This deposit account allows you to choose your notice period (between 15 and 90 days) and what portion of your money you want available to you on demand (between 10 and 50 percent). Your interest rate is determined by the notice period you select, the portion of your money that is available to you on demand and your balance.

You need R1 000 to open the account. There is no monthly fee and nor do you pay deposit or withdrawal fees. The only fee is a penalty fee for accessing more than the amount available on demand before your selected notice period.

On a deposit of R1 000 held for 90 days and with 10 percent available to you, you can earn 3.15-percent interest. Notice Select offers tiered interest rates ranging from 2.25 percent to four percent on a deposit of R9 999.

For deposits of more than R10 000: In addition to Notice Select and fixedterm deposits, Absa rates the new Depositor Plus. On this account, you can access your money at any time and deposit additional amounts at any time – and at no cost if the deposits are done electronically. The account attracts no monthly fees.

A minimum initial deposit of R15 000 is required to open the account and you must maintain a minimum balance of R1 000 to keep the account open.

Interest of 3.7 percent is paid on the lowest tier (deposits of R15 000 to R24 999), and interest of five percent, which is the highest rate on offer on this account, is paid on the highest tier (on deposits of R10 million to R25 million). African Bank offers three savings products: fixed deposit, access fixed deposit and notice deposit accounts. The notice deposit account is a 32-day notice account, with a minimum investment amount of R1 000. You can currently earn interest of 5.5 percent a year on this account.

You need a minimum of R5 000 to open a fixed deposit or access fixed deposit account at African Bank. On interest may be out your reach – or the strings attached might make the product unattractive or unsuitable for you. You also need to consider inflation, which is currently 5.6 percent. If you’re earning interest at a rate that is lower than inflation, money sitting in a savings account is, in fact, being eroded.

Prem Govender, the chairperson of the South African Savings Institute, says it’s no wonder that there is R45 billion sitting in stokvels.

“Although there would be little, if any, growth on that money, people still feel more comfortable leaving their money in a stokvel than in a bank, Govender says. “It’s a trust issue – and the fact that consumers are averse to massive charges. We get told over and over: ‘My money might not be earning [any interest], but at least I’m not losing anything [to bank charges].’”

Govender says that if the banks really want to incentivise consumers to save, they need to “get creative”.

“Like a store would have a loss leader to attract you into the store, so that when you’re there, you’ll buy other things, surely the banks can come up with innovative ways to encourage people to save?” both accounts, the longer you stay invested, the higher the interest earned. Investment terms on both accounts range from three to 60 months (although there is no 48-month term).

The access fixed deposit pays between 5.55 percent (on investments held for three months) and 8.20 percent (for money invested for 60 months). The fixed deposit pays interest of between 5.65 percent (over three months) and 9.50 percent on money invested for 60 months. These terms and rates are fixed, and none of African Bank’s savings accounts attracts fees.

For deposits of under R10 000: Aasha Patel, the head of treasury funding at African Bank, recommends the 60-month fixed deposit. Patel says the product is suited to the investor who wants to preserve capital and enjoy regular, fixed interest payments. You can elect to receive your interest monthly or twice a year, or you can capitalise it, but in essence the longer you invest a sum of R1 000 or more, the more it will benefit you. The account attracts no fees.

For deposits of more than R10 000: Patel recommends the 12-month Access Fixed Deposit. She says it offers the shorter-term investor the best of both worlds, with cash-flow flexibility and competitive interest rates. You can draw up to 30 percent of your initial investment over the term of the deposit – within 48 hours (at no cost) – “while still paying a very attractive interest rate of 6.20 percent”. You don’t pay bank charges. Capitec offers just one account – the Global One, which is a transaction-cumsavings account with a monthly fee of R4.50. You need only R25 as an opening balance. On the Global One, you earn five-percent interest on balances of less than R10 000. Balances of R10 000 or more attract interest at 4.25 percent.

You can create various savings plans (up to four) within the Global One account. In other words, you can ring-fence amounts of money in your everyday account for different

A recent ThinkMoney survey shows that most consumers are looking for the best interest rate when comparing savings products. Fifty percent of respondents said high interest is most important to them; 31 percent rated low fees as most important and 12 percent said they want immediate access to their money. Eight percent said they use their bank account for savings.

When comparing what the banks offer (see “The best from the banks”, below), remember that all interest rates quoted are annual rates (so you will get a pro rata rate for terms of less than a year), but, depending on the type of account, interest can be calculated on a daily, monthly or yearly balance, and can be paid out monthly or annually. If you choose to receive your interest monthly, some banks give you a slightly lower rate than if you choose to receive it annually. When you receive your interest annually, you benefit from compounding (interest on interest).

Check if the bank is quoting you a nominal rate or an effective rate. The nominal rate is the stated or simple purposes, including long-term goals.

Charl Nel, the head of communications at Capitec, says these savings plans help clients budget better. “My gran used to work with envelopes (allocating budgeted amounts for various monthly expenses); this works in a similar way. I have a couple – one for entertainment, one for holiday savings, etc. I keep less than R10 000 in each of them to get five-percent interest.”

Your savings plans can be flexible, fixed-term (single deposit option or multiple deposits option) or both. If you go the flexible savings route, the above rates apply. But if you opt to make a single deposit and save for a fixed term (of between six months and five years), you can earn between 5.5 percent (over six months) and 7.8 percent (49 to 60 months) on deposits of more than R10 000. On a single deposit of more than R100 000 in a fixed-term savings account, you can earn up to 8.5-percent interest a year for 49 to 60 months.

For deposits of under R10 000: Aneesa Razack, the head of strategic growth at FNB Investment Products, recommends the My Notice Deposit account, which attracts no monthly fees. You need R100 to open the account and can access all of your money at 45 days’ notice, at no cost. On deposits of up to R9 999 you get interest of 1.80 percent.

For deposits of more than R10 000: FNB’s Flexi Fixed Deposit account allows you two free withdrawals of up to 15 percent of your available balance during the investment term. It pays interest at 3.75 percent for deposits of more than R10 000, and you can invest over three months or 12. You need only R100 to open the account, which attracts no monthly fees.

For deposits of under R10 000: Leon Daniels, the head of funding at Nedbank, recommends the bank’s Green Savings Bond, a fixed-term investment offering “highly competitive rates”. You need R1 000 to invest and rate, which ignores the impact of compounding, whereas the effective rate shows the effect of compounding.

Remember also that some banks offer preferential interest rates to “senior” clients – aged 55 and older.

ALTERNATIVES

If you can afford to invest for up to five years or more, unit trust funds and RSA Retail Bonds will generally give you a better return than bank deposits. However, with unit trust funds your returns cannot be guaranteed, so you carry the risk. Unit trusts can have high minimum investment amounts, but there are some that accept small monthly or lumpsum amounts.

For example, you need only R50 a month or a lump sum of R500 to invest in the Stanlib Equity Fund. The fund has delivered a 26.58-percent return over the past year, 21.67 percent a year over three years, and 6.68 percent a year over five years.

But beware of pure equity funds and those with exposure to equities: performance is volatile, so you should invest for at least three years. can earn between 5.93 percent (over 18 months) and 7.44 percent (over 60 months). You can also invest over 24 or 36 months. There are no fees.

For deposits of more than R10 000: Daniels recommends Nedbank’s JustInvest money market account, which offers rates tiered according to your balance. You need R5 000 to open the account and can make additional deposits of R500 or more at any time. You get four free cash deposits a month, provided they do not exceed R5 000 in total. The JustInvest account pays interest of four percent on a balance of between R10 000 and R19 999. To earn the highest rate on offer (4.75 percent), you need a balance of at least R500 000.

For deposits of under R10 000: Sugendhree Reddy, the head of personal banking at Standard Bank, recommends three accounts: the ContractSave account, a 32-day notice account and a fixed deposit. On ContractSave, you commit by debit order (of no less than R100 a month) to saving for a set term of between one year and 20 years. On balances of less than R10 000 you earn interest of 3.25 percent. You also earn bonus interest for each year that you leave your money in the bank. Bonus interest increases every year, until the fourth year, to two percent “at which point you earn an additional two percent a year in perpetuity”. (Although you can make additional deposits, ContractSave is for regular monthly saving – not for lump-sum deposits.)

On amounts of R250 to R9 999 in a 32-day notice account, Standard Bank pays interest of between two percent and 2.02 percent. On balances of less than R10 000 invested with a notice period of between 33 days and three months, you get 3.50 percent.

On Standard Bank’s ordinary fixed deposit, if you invest at least R1 000 for 48 to 60 months, the bank will give you 4.80 percent interest.

For deposits of more than R10 000: If you have R100 000 or more to save, Reddy recommends the bank’s Money Market Call account. On the lowest tier (balances of R100 000 to R249 999), you’ll earn interest of 4.35 percent, and on the highest (R20 million and more), you’ll earn interest of 4.50 percent.

RSA Retail Bonds offer above-inflation returns, which are guaranteed. The RSA Inflation Linked Retail Savings Bond is offering 2.25 percent above inflation over 10 years, 1.25 percent above inflation over five years, and one percent above inflation over three years.

Warren Ingram, a financial planner at Galileo Capital, says that when choosing a savings vehicle, your criteria should be your time frame and your unique tolerance for risk. “If you tell me you want to save but might need the money in two years, an interest-bearing investment, such as a fixed-deposit account, is your only option. If you have three to five years, a moderate-risk unit trust fund would be fine. But if you have five to seven years, a balanced fund or shares could be the way to go.”