It's a tough time for Irish savers. With European interest rates on the floor, deposit rates have plummeted in recent years.
"It has been a persistent challenge and question for people in the last two/three years," Vincent Digby, managing director of Impartial Financial Advice says.
And they continue to fall. Indeed some are so low they can fall no further without imposing negative rates on their customers.
Bank of Ireland for example is currently offering a zero return on instant access deposits. Last month KBC Bank became the latest to cut rates, halving rates on its regular saver account from 1 per cent to 0.5 per cent as of August 4th.
The potential return offered by prize bonds, a favourite of many Irish savers has also diminished, with just 0.5 per cent of invested money returned in prize money, down from 0.85 per cent previously, and from 1.25 per cent in 2016. The move means that the level of prizes on offer will fall, with just two chances to become a millionaire in a year, down from six previously.
Irish banks are applying harsher cuts to deposit rates than those across the euro zone. Figures from the European Central Bank in May for example, showed that Irish savers will earn just €10 on a €10,000 deposit, compared with €179 in Slovakia, €145 in the Netherlands or €98 in France.
The situation is compounded by the fact that platforms such as Raisin.com remain out of scope for Irish residents.
Of course the situation may change, as the European Central Bank looks to start tentatively withdrawing stimulus and ending its quantitative easing programme by the end of the year.
“We think there’s at least a 50 per cent chance of a rate hike in Europe by the back end of next year,” notes Brian O’Reilly, head of global investment strategy with Davy, adding, “I don’t think people should panic. We are at a point in time and in 12 months time we could be looking at a very different”.
But it may take some time further for deposit rates to start to climb once more. After all, as O’Reilly notes, banks haven’t moved mortgage rates down in line with ECB rates so why should they move deposits rates up when they start to rise again?
For the short to medium term then, “the only way to be able to generate a return of above 1 per cent is to accept a level of risk”, advises O’Reilly. “There’s no magic formula.”
So, if you’re less than enthused by earning just €65 a year on a deposit of €15,000 what are your options?
Stick with what you have
Officially, inflation is low, which means that the “real” return on your money may not be diminished. Irish consumer prices for example, actually fell by 0.4 per cent in the year to June 2017, as the cost of food, clothing and furnishings fell.
“In terms of being worried about your cash deposits being eroded by inflation or the time value of money, we wouldn’t be too panicked about that,” O’Reilly says, noting that we’re far away from the double-digit inflation years of the 1970s and 1980s.
“For someone who’s very, very conservative, we wouldn’t be advocating them to do anything,” he adds on whether or not someone should switch out of deposits.
However, while inflation may be falling, households are still facing inflationary pressures on many of their expenses, be that rent, car insurance or health insurance. This can put more pressure on them to earn a decent return on their savings.
“You wouldn’t think we’re in a very low inflation environment,” as Digby notes.
Treasure the US
Irish savers can earn about 2.3 per cent on their money by allocating it to US 10-year treasuries, with an investment starting at about $1,000.
“There is a lot of product available today through exchange-traded funds,” O’Reilly says. However, he notes that investing in US bonds will incur treasury risk, while there is also a risk of bond prices falling as interest rates rise. But, while the price may fall through the 10-year term, “if you hold till maturity you will get your money back”, O’Reilly says.
Consider an absolute return fund
A favourite of some more risk adverse investors, for their ability to deliver positive returns regardless of the market conditions, absolute return funds continue to grow in popularity. Options in the Irish market include Standard Life’s Global Absolute Return Strategies Fund (GARS) and Aviva’s Multi-Strategy Target Return fund.
However, their performance has been challenged of late, with Standard Life’s GARS fund down by 2.07 per cent in the two-year period to July 2017, for example.
“There has been more downside than people expected,” notes Digby . “We are monitoring and keeping an open mind but it’s difficult to be overly enthusiastic at the moment.”
Avoid bank charges
If you need to keep a certain amount on deposit in your current account to avoid bank charges, you should make this more of a priority than earning a dismal return on your deposits.
“It can be better use of your money than earning 0.01 per cent,” notes Digby.
Indeed keeping €2,500 in your current account with AIB for example, can avoid charges of potentially more than €100 a year. If you were to consider this as an “interest” on your money, it works out as a return of 4 per cent – which is significantly higher than anything you’ll get on deposit.
Get into equities
Equities may seem like the obvious answer to someone chasing a higher return but, before you do so, it’s worth considering your own tolerance for risk: can you afford to lose this money? Can you afford to lock it away?
“That’s a personal question. There is no right/wrong answer,” says Digby.
Typically, stock market investments are recommended over a time horizon of three to five years. “The longer you’re invested you’re reducing the risk of coming up with a loss,” advises Digby.
Taking an “averaging-in” approach, whereby you allocate money perhaps that was going to regular savings into a stock market fund can help weather the vagaries of the market.
Most of the life companies now offer investment products, often wrappers of exchange-traded funds (ETF) which make it easy for Irish investors to allocate to the market on a regular basis. However, fees on these products tend to be considerably higher than their underlying ETFs or index funds. But allocating to an ETF on a monthly basis will incur regular stockbroker fees, while the Irish funds may be more tax efficient as your investment rolls up tax free.
Using equities to generate an income can be another approach to generate decent – if riskier – returns than deposits.
O’Reilly points to the recent IPO of Irish windfarm company Greencoat as offering a high dividend yield of about 6 per cent, while British pharma group GSK is another possibility, with a dividend yield of about 5 per cent.
Pay down debt
“If you have debt that’s anyway expensive – credit card, mortgage etc – pay down the debt,” suggests Digby.
If you’re paying 3.5 per cent on your mortgage, overpaying this can offer a better return than keeping money on deposit earning less than 1 per cent. Putting €200 a month against a €250,000 mortgage could save you €15,000 in interest alone on a mortgage that has 19 years to run, as well as cut three years off your mortgage term.
Go for a multi-asset fund
Multi-asset funds, something akin to the old managed funds, continue to grow in popularity in Ireland, allowing investors to allocate across the asset types, including bonds, equities and alternative assets, with many also allowing you to match your risk profile with an investment. They come with the benefit of diversification and potentially greater returns than keeping your money on deposit.
O’Reilly suggests you could probably target a 4-5 per cent annual return on multi-asset funds.
Irish Life, Zurich Life and Standard Life are just some of the players in this field. Irish Life’s Multi-Asset Portfolio (3) for example, has returned 17.85 per cent in the three years to July 31st.
“Irish Life leads on performance alone, but each firm has a different approach so you need to look under the bonnet,” Digby says, adding that investors need to consider that just because past performance has been good, will the period ahead be as rewarding?
“Be careful to assess potential downside risks if the investment conditions are negative”.
Look to property
Some of the ways to invest in property include via equities, such as real estate investment trusts (reits) or property funds. Property fund Iput for example, is yielding about 4-4.5 per cent.
“As a pure income play, property is hard to beat,” says O’Reilly. However, he also cautions that of course property prices can fall as well as rise, so they are a risky proposition, while liquidity can also be an issue. As was the case with UK funds post-Brexit, redemptions can be suspended.
“A slightly left-field option” for Irish investors is a German food retailing fund run by Greenman Investments. The fund could be suitable for ARF investors, Digby notes, to meet their 4-5 per cent ARF annual income drawdowns, as it is based on initial premium invested and not on fund value.
The fund offers a projected yield of 5.5 per cent a year, with total returns projected at 8 per cent a year over a five-year holding term. You will need a considerable sum to invest however (the minimum is €125,000 unless via Friends First for pensions).
Get a guarantee on your money
Capital-protected products, such as tracker bonds, with profit funds and protected funds, have proliferated in recent years, appealing to risk averse investors who are looking for a better return than that offered on deposits.
Such products typically consist of an equity plus cash element, and aim to deliver returns in excess of cash interest rates.
However, charges can be high, returns may be capped, and early redemption may be either difficult or costly.
“I’m a non-believer on these, as with interest rates so low, it can be a challenge to get a potential upside,” Digby says, adding, “low rates make it very difficult for that structure to add value”.
Instead he suggests investors look to replicate a bit of the structure by keeping a certain proportion of their savings on deposit and investing the rest in the markets.
