The Irish savings paradox: A nation of savers, but not savvier savers
The Irish are a nation of savers, with over €170 billion in household savings. However, despite this impressive figure, the reality is that many Irish savers are not making the most of their money. The vast majority of savings are held in low-yield current accounts, earning virtually nothing in interest. This is a problem, as inflation is currently running at close to 4%, meaning that those with money on deposit in a low-yield current account will lose value at a rate of more than 3% between now and next June.
The situation is further complicated by the fact that the interest rates on offer from Irish banks are extremely low. For example, AIB, Bank of Ireland, and PTSB offer 0.25%, 0.1%, and 0.01% respectively on lump-sum savings. This is a stark contrast to the 3% rate offered by Bank of Ireland on regular monthly savings of up to €2,500 a month, or the 3.1% rate offered by Raisin Bank on sums up to €100,000.
The issue is not just about the low interest rates, but also about the tax implications. The deposit interest retention tax (Dirt) cuts the interest by one third, and savers have to file a tax return themselves, as Raisin does not deduct Dirt at source like Irish banks do. This means that the effective interest rate on savings is even lower than it first appears.
The problem is not just about the individual saver, but also about the broader economic context. The ECB's first interest rate increase in over a year has made it clear that the days of easy money are over. Irish savers should be asking whether their money is working hard enough, and whether they are making the most of the opportunities available to them.
One solution to this problem is the new Government savings scheme, which is to be announced by Minister for Finance Simon Harris in his budget later this year. The plan is to make investing easier and more transparent, and to help Irish consumers move their cash from poorly performing bank accounts to more lucrative managed funds. The scheme will be designed as a 'simple, one-stop option' for individuals, and will aim to simplify and adapt the tax framework to further support retail investment.
The survey from Royal London Ireland found that almost three-quarters of Irish adults are open to investing for long-term wealth-building rather than relying on low-interest cash deposits. This suggests that the new Government savings scheme could be a game-changer for the Irish savings culture. However, the key to success will be making the process straightforward and easy to understand, and ensuring that the barriers to investment are not about fear of losing money, but about access to information and feeling informed enough to make a decision.
In the meantime, savers should be aware of the opportunities available to them. Online platforms and European deposit providers are offering rates of 3% or slightly more, and a simple way to approach this is to think in three time horizons. Short-term savings of up to three years are best kept in deposit accounts with guaranteed protection up to €100,000 per institution. Medium-term money may benefit from a blend of deposits and investments, and for long-term savings of 10 years or more, a structured investment strategy appropriate to your risk profile will almost always outperform cash over time.
However, savers should be cautious about the details of the rates on offer. Some of the headline rates may only apply for one year or on balances up to a certain limit, so it's important to do your research and understand exactly what rate you're getting and for how long. For those with a longer-term savings goal, considering an investment policy or managed fund from the likes of Aviva, Irish Life, or Zurich may be a good option, but it's important to remember that you'll be subject to taxes, fees, and charges, so even here getting a half-decent return can be tough, unless markets are highly in your favour.
In conclusion, the Irish savings paradox is a complex issue, but it's one that can be addressed. By making the most of the opportunities available, and by adopting a more sophisticated approach to savings, the Irish can become savvier savers and make the most of their hard-earned money.
