It's not an easy time to be a saver. In a world of low, zero or even negative rates, savers are having to come to terms with muted returns on their deposits.
Indeed, earlier this month savers and investors found themselves being charged to hold German bunds, as the rate on the 10-year bund slipped below zero while, closer to home, Bank of Ireland cut its one-month rate for corporate deposits to zero in May, in one of the first signs of “zero” rates on the Irish market.
More recently, the National Treasury Management Agency recently cut rates on a host of its State savings products and even sold short-term debt at a negative yield in the market.
This means that Irish retail savers, in turn, are feeling the pinch with negligible returns on offer across the board.
As our table shows, the most someone putting €15,000 into an instant access account could hope to make in a year would be just €114 – or even less when you consider that Dirt and PRSI will take as much as 45 per cent of this return.
Even locking the money away won’t help much, with the best rate on offer KBC’s 1.15 per cent offering a return of €172.50 on the year.
State Savings products offer the extra incentive of no Dirt, but as already mentioned, rates on these products have recently been cut sharply.
So what should savers do? The temptation may be to forgo deposits in favour of higher yielding assets but taking on more risk than you're able for can lead to some nasty surprises.
We spoke to six money experts for their views on what savers should – and shouldn’t – be doing in the current climate.
Is there any hope for savers?
While the US Fed may have already made a move, an increase in interest rates in the euro zone doesn’t appear to be on the horizon. But savers shouldn’t despair just yet. As some advisers note, in a low inflationary environment the impact of low interest rates on the real value of your money is not as damaging.
For Jonathan Sheahan, managing director of Compass Private Wealth, it's all about looking at savings from a "relative" as opposed to an "absolute" perspective.
“For example, a return of 0.75 per cent per annum when European inflation is at zero and when base ECB interest rates are at 0 per cent is better than earning 2.75 per cent when inflation and base interest rates are at 3 per cent,” he says.
David Quinn, managing director of Investwise agrees, arguing that with zero inflation "there is no immediate pressure to move money away from cash. Even a return of 0.4 per cent after Dirt is protecting the real value of people's savings for the moment".
However, as Paolo Maggioni, senior research analyst with Goodbody Stockbrokers warns, this situation might persist for some time "so savers/investors have to look for other options" to grow their nest egg.
What are the alternatives?
Returns of less than 1 per cent are simply not enough to meet some people’s expectations. So what are the alternatives?
“If someone wants to generate more than 1 per cent, they probably need to consider other investments, such as multi-asset funds, high quality blue-chip dividend-paying equities or property that do pay higher levels of income, but also come with a much higher level of risk,” advises Brian O’Reilly, head of global investment strategy in Davy Private Clients.
But, as Quinn adds, “there is no free lunch”. To get a better return, you will generally need to take on more risk.
The obvious option is to consider allocating money to the stock market but for someone used to the security of deposits, this can be a risky route.
"For longer-term investments, where the objective is to secure capital growth over the long term (five years plus), individuals can consider tax-efficient investment funds," suggests financial adviser Simon Shirley. However, he adds, "capital is usually not secure".
Capital protected products are another option. They often look attractive in this environment, promising a better return than deposits but with less of a downside than equity instruments. But advisers suggest savers tread carefully when considering these options.
As Sheahan notes, “they are not as low risk as they are often portrayed”.
“They should be considered complex financial instruments as they often use derivatives on underlying financial instruments such as stocks to generate returns. They are also relatively expensive and investors often forgo the dividend available on the underlying stocks. You also need to consider the credit rating of the issuer,” he says.
Maggioni agrees. “We have to remember that capital protection products don’t offer protection for free. They are normally quite expensive and, in a low return environment, we don’t think it is the right answer,” he says. Instead, he suggests absolute return strategies with low volatility which offer “a greater opportunity to earn some income”.
Prize bonds are also very popular, but their attraction has diminished in recent times, with the number of weekly prizes falling from 8,000 to 5,800.
Paying down debt is another option.
“If a saver is getting less than 0.5 per cent after Dirt on their savings and they have a variable rate mortgage on say 3.5 per cent, it would be well worth considering reducing the borrowings first and foremost,” says Sheahan.
Peer to peer lending is another option, where you can get returns of about 8 per cent by lending money to local businesses via vehicles such as Linked Finance and the Grid. Ian Quigley, head of investment strategy with Investec, however, expresses caution on this front, pointing to the recent example of Lending Club in the US, which fired its chief executive amid questionable lending practices.
Another option is to seek out higher deposit rates through a pan-European vehicle, such as Raisin.com, which currently offers a rate of 1.4 per cent on a one-year fixed rate deposit from Polish bank Alior. Still, getting the best rates may come with its own risk.
While O’Reilly concedes that “more competition is needed in the Irish banking sector”, he says savers should exercise due diligence on any institution that’s offering above average rates.
“For any institution offering higher deposit rates, savers should ask which banks are they putting their money on deposit with? Do they have the same credit rating as my current bank? What countries are they domiciled in? For example, Argentinian banks pay over 10 per cent on savings but that doesn’t make them safe.”
Will people take on too much risk?
With options so limited then, there seems to be a real risk that people will take on risk that they’re not comfortable with, just to beat returns that deposits are offering.
“There is a real risk that the ‘financial repression’ savers are being put under today may result in people taking on too much risk and investing in things they do not fully understand to generate an income. More often than not this ends in tears,” warns O’Reilly.
“This is actually what QE is designed to do – to get people spending and investing again”.
But if it’s your hard earned money, you may not be willing to sacrifice it to meet European Central Bank monetary goals. So how do you get the balance right?
“We would encourage investors to retain a reasonable amount of cash, allowing the balance of their capital to be invested without the need to draw from it for at least five years,” says Quigley.
It’s a key point – that if you do invest money, you do so on the basis that it’s “locked away” for the medium-term, so that it can withstand market volatility at particular points in time.
Shirley agrees. “Risk averse investors may be tempted to look elsewhere. However, most risk averse investors should only risk a minor proportion of their savings – ie most of their savings should be secure, as capital preservation is much more important than the potential for returns on investments.”
And just because deposits rates are rock bottom doesn’t mean you should shift your saving habits.
“Savers should always consider first and foremost their own appetite for and tolerance to risk. If answers to both of those questions is ‘low’ then they shouldn’t get frustrated with low deposit rates and should take their medicine of low rates,” argues Sheahan.
If you’re wondering which way to go, Quinn suggests you ask yourself a question. “I would ask investors, if they have been invested in cash up to now, why is that?” he says, as he warns savers against investing now unless it is a long-term investment and they don’t require short-term access.
“At current valuations, risks of a loss of capital are higher than they have been, judging by long term trends.”
