Does it make cents to stay on Deposit?
A recent announcement from Bank of Ireland stated that as of Sept 15th they will be applying negative Interest rates of -0.65% to all specialised Deposit accounts. For the moment this move only applies to Deposits held by Pension trustees but it has lead to concerns that other banks may follow suit and start charging companies for their deposits. There is already anecdotal evidence of the pillar banks charging the likes of Credit Unions and Corporate Customers negative Interest rates on their larger Deposits held with them.
The banks defence is that European Interest rates have been negative for quite some time are expected to remain so for the foreseeable future. The bank claims it can no longer absorb the cost of keeping Customer money on Deposit and must therefore pass it on.
This news comes at the same time that the Central Bank have just announced that Irish Households put €5.3 billion on deposit between April and June 2020. This compares to savings of almost €2 billion in the same three month period last year. The pandemic restrictions meant some households, that weren’t impacted by loss of income during the pandemic, put money aside that they would ordinarily have spent in the wider economy. Its ironic that Irish Household deposits have reached their record levels at a time when Deposit rates have never been lower.
Over 25% of all Irish wealth is held on deposit, that’s three times more than in frugal Canada and twice as much as our neighbours in the UK. This is indicative of our very conservative nature when it comes to Financial Investments.
What does Negative Deposit rates actually mean in terms of annual returns? Let’s say someone has €100,000 in a Fixed Term Deposit account for 12 months. A few years ago you could have realistically expected to get a return of 1.5% pa. This would equate to €1,500 interest, you would then pay DIRT of 33% which would’ve left you with a Nett return of €1,000.
Today however, that same €100,000 on deposit will have a rate 0f -0.65%, this means your Deposit will be reduced each year by €650 as a result of the negative rates, Not to mention the damage also being done by Inflation over time
Inflation should be the biggest concern for Depositers during this type of low interest rate environment, your nett return needs to consistently beat the prevailing rate of Inflation in order to get a real return on your money. Fortunately, the inflation rate is relatively low at the moment however the long term target inflation rate across the Eurozone is 2% which means leaving your money on deposit for the long term will most likely erode its real value over time.
So, where to now for anyone who wants to avoid negative rates of return?
The first step before deciding to move from Deposit is to ask yourself whether you’re a long term investor or a short term saver. For example, if you’re 40 years old and have €150,000, you’d be well advised to take your money out of a deposit account and explore your long-term investment options. However, if you’re 25-years-old and are saving for next year’s holiday, then a deposit account may be a viable option. It all depends on your short- and long-term financial objectives.
Seeking Independent financial advice is a must for anyone considering moving off deposit. Why? Banks and building societies may have a vested interest in keeping your funds on deposit or selling you their products, which means that their advice is rarely impartial. Whatever your situation, it looks like this low interest rate environment will continue for a number of years therefore It pays to make yourself fully aware of your long-term investment options.
Barry Kerr is Managing Director of Wealthwise Financial Planning who are based in Block C, Hartley Business Park,, Carrick on Shannon, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.