Inflation is forecast to touch almost 1 per cent this year, but with deposits still someway south of this, your real wealth could start to diminish. And don’t expect things to change anytime soon.
"In terms of interest rate rises, we see nothing of significance in Europe for the next two years and expect a cautious approach to interest rate rises from central banks globally," says David Sommerville, financial adviser with First Choice Financial Services.
So what to do? One option of course is to do nothing. Remember, while low yielding, the beauty of deposits is that they are so risk free, particularly if you spread them around different banks so that you have no more than €100,000 in any one institution.
“Any move out of deposits, by definition, is going to involve taking more risk,” Somerville warns.
Vincent Digby, managing director of Impartial Financial Advice, says many deposit savers will be conservative investors – more concerned with the prospect of a 5 per cent loss than they are satisfied or pleased with a 5 per cent gain.
However, you do risk your money losing its value if you leave too much on deposit.
“Deposits are important and have many advantages but the trade off is little or no return. You can’t have it both ways,” adds Somerville.
But before you make a move, you should consider the “reasonable worst-case scenario”. If this “worst” outcome is too unpalatable, move further down the risk spectrum until you find an investment that won’t cause you too much “undue anxiety”, Digby advises.
And remember options outside of deposits may mean that you need a longer time horizon. “Generally we recommend a minimum holding period of at least three years for non-deposit based investments,” Digby says.
1: Bonds
Traditionally, the first stop after deposits used to be government bonds, with such investments allowing you to lend your money to governments in return for a “coupon” or interest rate.
But, with yields at historically low levels – Irish 10-year bonds are currently yielding about 1 per cent and German bunds about 0.6 per cent – “this too is unattractive for many investors” says Sommerville. After government bonds, or gilts, people might consider investment grade corporate bonds, Somerville says, “but again, with spreads so tight, it is hard to see value.”
Minimum investment: about €5,000
2: Pay down mortgage
David Quinn, managing director of Investwise, suggest that before you put money into low yielding deposits, you might want to pay debt down first.
“For anyone not on a tracker, this is often the best option,” he says. With variable mortgage rates above 3 per cent in most cases, it will be very hard to beat the interest saved by opting instead to invest.
He gives an example of a €50,000 lump-sum. To beat the savings you’d make by putting this against your mortgage, a pre-tax return of 5.2 per cent a year would be required on the investment. To get such a return could mean putting the money into a “highly volatile portfolio”. Paying off a mortgage on the other hand, will result in a risk free return equal to the interest rate.
“Obviously, once the mortgage payment is made, those funds are gone,” he cautions, “so its not a solution for those who may require access to the cash in the future”.
3: Go for property
Property is a popular alternative to cash deposits, Quinn notes, given the medium risk profile and high income potential. But buying a property outright, though it can offer a steady yield, particularly in the current environment, could also represent a risk unless you’re adequately diversified. And it can also be very illiquid.
A property fund which invests in several buildings, might offer the solution. Somerville says the returns of property funds, annualised, is in the region of 10 times what you might get on deposits – 5 per cent versus 0.5 per cent.
“Even if they come in at 3 to 4 per cent, it is still substantially way above what you will get on deposit,” he advises.
Corporate clients can also look at investing their reserves into a property fund via a life company policy. Doing it this way will see your investment grow on a gross roll up basis, paying 25 per cent tax only on exit (or on the eighth anniversary of the investment) and avoiding any close company surcharge, suggests Sommerville.
But remember, tomorrow may not be like today. While such funds can appear stable, as Quinn notes, “in the aftermath of the 2008 crash, many initiated a six-month notice period for withdrawals so there is the potential for liquidity issues”.
If the idea does take you, possibilities include Standard Life’s Global Real Estate Fund, which has properties in Australia, Japan, Europe and the US. Closer to home, Sommerville suggests Friend’s First Irish Commercial Property Fund. Another option is Irish Life’s Irish property fund. Further afield, Digby also suggests the Greenman Open German Retail Property fund, which focuses on the food retailing sector, with total returns targeted at 8 per cent a year after costs. With this German fund, the minimum investment is €125,000, or €15,000 for pension savers.
Minimum investment: about €10,000
4: Opt for a Reit
Another option is to consider a listed property company, known as a real estate investment trust (Reit). Listed on the stock exchange, they are very liquid, as you can buy and sell your holdings like a share. And they are subject to capital gains tax, which, if you are sitting on capital losses, can be an attractive consideration.
Irish Reits will potentially offer a dividend of between 3.5 per cent and 4.5 per cent this year, says Quinn, adding that the underlying price of the “shares” may also move up – or down – depending on market fundamentals. Another option is a fund of Reits, such as that offered by Zurich Life, which invests in a selection of Irish Reits.
“As a medium-term holding, they may have a place for investors looking to take a reasonable amount of risk, while receiving strong short-term dividend income,” says Quinn.
Of course investors shouldn’t just consider Irish property. You can buy into property across the world via your stockbroker.
Minimum investment: about €500
5: Look to equities – with a dividend yield
Listed companies can offer much better returns – albeit at much greater risks. “As a long term hedge against the cost of living, nothing beats the stock market,” says Quinn.
If you can lock away your money for 10 years, “there is plenty of time to weather short-term volatility”, he says. Stocks can also offer a regular income. The average dividend on the Eurostoxx 50 for example is currently 2.88 per cent.
“So even if you don’t see any capital growth on the investment, this income comfortably beats inflation and deposit returns at the moment,” Quinn advises.
To spread your risk, you can put your money into a cheap(ish) index tracking equity fund from €250 per month, or a €5,000 lump sum, either through life company or with a stockbroker. or directly with a Stockbroker.
Minimum investment: €250 month/€5,000
6: Multi-asset funds
For Digby, multi-asset funds, which invest in a mix of assets such as shares and property, can be a good starting point for those moving from deposits, as they tend to be more conservative.
The small print first; you’ll usually have to lock-in for five years or face exit penalties which can be hefty. And there is a one off 1 per cent government levy.
Irish Life’s Maps range, for example, offers five different risk return profiles, while another option is New Ireland’s ifunds range, which offers a “death benefit” for no additional charge. This means that if the investor dies before the first five years of the investment have elapsed, New Ireland will at a minimum repay the amount invested. The benefit also applies to pensions and ARFs, and Digby has noted that some clients have found this to be comforting when moving from deposits.
Minimum investment: €20,000 for Irish Life/top up from €1,000; €5,000 for New Ireland; top up from €2,500
7: Peer to peer lending
If you’re looking for better returns – though admittedly with more risk – peer to peer lending is worth considering. Through platforms such as Linked Finance and the Grid, you lend your money to small businesses, and your return is the rate of interest they pay on your money. Such platforms promise an upside of as much as 17.5 per cent, but do your research before lending. If the company folds, your investment can go with ti.
Minimum investment: €50
8: Prize bonds
If you’re fed up with deposits, prize bonds are unlikely to offer you too much succour – unless you’re hopeful of a €1 million win. The chances of winning with a prize bond has decreased in recent years in line with interest rates, as the frequency of prize draws and total prize fund has been cut.
Minimum investment: €25
9: Capital protection
If you like the protection of deposits, but want more of an upside, you could consider a capital protected bond.
Brian Carey, head of business development at BCP Asset Management, points to deposit-based investments such as the BCP Deposit Outperformance Bond 14. This offers 100 per cent security (provided by Goldman Sachs), while investments are also covered by the deposit protection scheme. You will, however, have to lock your money away for six years, while the return is less than you might expect if you had invested unprotected in the market, at 2.5 per cent a year.
Minimum investment: €50,000
10: US treasuries
US 10-year treasuries recently passed the 3 per cent mark for the first time in four years, and the returns could look positively tasty for Irish savers. You can invest in treasuries outright or via funds/ETFs, but remember you’ll also be taking on currency risk.
Minimum investment: about $1,000
