The importance of having easily accessible savings has never been clearer, writes FIONA REDDAN

THE RETAILERS on Grafton Street may bemoan it, but there is no doubt that saving, rather than spending, has come back into fashion since the recession kicked in.

With many people needing to access their rainy-day funds after losing a job or suffering a drop in income, the importance of having an easily accessible lump sum has never been clearer.

The drive towards saving is illustrated by the latest Postbank quarterly savings index, which revealed that more than 80 per cent of those surveyed were now saving on a regular or lump-sum basis. Most of these savings were for emergency funds. Savings are expected to remain high over the coming year, with the Economic and Social Research Institute predicting that people will save about 13 per cent of their income next year, the highest level since 1978. While regular savings products abound, you need to do your homework before rushing in. Did you know, for example, that some investment fund providers take almost a full monthly savings payment each year in fees and charges from regular savers? Or that banks routinely sweep funds from high-interest regular saving accounts into accounts earning minimal interest? Or that leaving your money in a badly paying account can cost you hundreds, if not thousands, of euro in interest foregone?

If you are already a regular saver, or if you are one of those people who has rediscovered the savings habit, what options are out there and what do you need to know before making, or sticking with, your choice?

HOW MUCH TO SAVE

It seems that many people have carried on the good savings habit they started as a result of the Special Savings Incentive Account (SSIA) scheme. According to the Postbank survey, the average sum being saved every month is about €305, which is close to the €254 maximum allowed under the SSIA scheme.

While it may be down from the €344 recorded when the index began in 2008, such savings can reap significant dividends. For example, €304 saved every month over three years, earning an interest rate of 5 per cent, will return almost €12,000 before Deposit Interest Retention tax (Dirt) is deducted. If you extend the period to five years, the investment jumps to €20,699, and to €47,117 after 10 years. By comparison, if your savings only earn 3 per cent, returns will be €11,500, €19,681, and €42,500 after three, five and 10 years respectively. So it definitely pays to get the best interest rates available.

FIND THE BEST ACCOUNT

While the European interest rate, as set by the European Central Bank, may be just 1 per cent, given how much the banks need to boost their deposits, savers can get a much better return on their money if they choose wisely.

The Irish Financial Services Regulatory Authority’s consumer website, www.itsyourmoney.ie, publishes a survey on the interest rates banks are paying on their regular savings products. As it is regularly updated, it is a good source of information on the latest rates.

AIB currently has one of the best rates on the market, at ECB+4 percentage points (5 per cent) for its Parent Saver Account.

Bank of Scotland has a fixed rate of 4.5 per cent on amounts between €100 and €1,000 a month on its Family Savings Account, while Anglo Irish Bank, which promises ECB+2 percentage points, is actually offering in excess of that at the moment. It pays 4 per cent on contributions of up to €1,000 every month.

Another good option comes from Irish Nationwide, which offers 4.35 per cent on amounts between €100 and €1,000. If you’re looking to invest in excess of €1,000 each month, UK building society Nationwide pays 3.3 per cent, and there is no monthly maximum.

CONSIDER TAX-FREE SAVINGS

Interest earned on deposit accounts is liable to Dirt at a rate of 25 per cent, which can eat into your savings. For example, if a lump sum of €10,000 earned 3 per cent over the course of a year, it would be liable for a charge of €75.

As an alternative, An Post offers some tax-free options, including an instalment savings plan. Under this scheme, the saver agrees to pay a stated sum of between €25 and €1,000 a month for a 12-month period.

Interest accrues on a yearly basis after the completion of the savings cycle, growing each year to a total of 20 per cent after five years (after the end of the savings period), which is equivalent to 3.37 per cent a year.

To maximise the interest return, An Post says the savings should be left on deposit for the full five-year term, ie six years after the first instalment was made.

BEWARE THE SMALL PRINT

While many of the headline rates offered on regular savings deposit accounts may impress, beware of the small print.

For example, Irish Nationwide’s guarantee of ECB+3.35 percentage points runs out on December 31st, while AIB’s promise of ECB+4 percentage points is only guaranteed until May next year. These rates may be extended, but there is no guarantee.

Some of the accounts also have limitations on withdrawals. For example, Anglo Irish Bank will not allow any withdrawals within the first six months, while EBS only allows one withdrawal during the first year on its Family Savings Account.

Moreover, many banks seek to attract customers by offering an attractive headline regular savings rate, but all the funds are moved into a lower-paying account at the end of each year.

For example, as mentioned, AIB’s Parent Saver Account pays a market-leading rate of 5 per cent on monthly contributions. At the end of each year, however, the balance from the account is swept into a different account, where the lump sum earns interest at just 0.5 per cent.

Also, there may be limits on the amount you can save each month. AIB only offers its 5 per cent rate on amounts up to €200 a month, while Bank of Ireland pays its 3.25 per cent rate only on balances of up to €5,000. Above this, the rate drops to just 1 per cent.

TAKE A PUNT ON THE STOCK MARKET

If you are prepared to take on more risk in return for a potentially better performance, you could consider allocating your regular savings to an investment fund.

Most fund providers have a regular savings option, and an “averaging in” approach of making regular forays into the stock market can smooth out the bumps associated with such investments.

However, you should remember that it is generally not recommended to invest in the stock market if you will need access to the money within five years.

There is a wide range of investment funds available for regular investors, with the required minimum investment starting as low as €50 a month.

For investors seeking to limit the possible downsides of investing in the stock market, an option might be a fund that offers some protection.

Zurich Life, formerly known as Eagle Star, for example, offers access to a wide range of protected funds through its Savings Plus platform. These funds have a protected price, below which the unit price of the fund cannot fall, which puts a cap on the losses your investment can sustain. Options include an international equity and a dividend growth fund.

If you’re looking for something extra, Bank of Ireland’s Smart Choice plan, a regular savings plan linked to the stock market, offers a 25 per cent loyalty bonus based on your first year’s investment, for those who commit to saving regularly for seven years.

So, if you save €304 a month, you will be due a bonus of €912 after seven years. The minimum investment is €100 a month, and you can choose from a wide range of options including a global equity and gilt fund.

RaboDirect offers one of the widest ranges of funds on the Irish market and regular investors can choose from options such as funds investing in water, Indian equities, high- yield bonds and healthcare equities. The minimum investment starts at €100 a month.

You could also consider investing in an index-linked or “passive” fund.

For example, Quinn Life allows you to access the full suite of the firm’s funds, including a European and US equity fund, by making monthly contributions starting at €50.

WATCH OUT FOR FEES

Like regular savings accounts, investment funds have their downsides, so you need to do your research before deciding on the product that best suits your needs. The fees associated with such investments can often negate the potential returns.

Take Bank of Ireland’s Smart Choice product. Contributions of up to €1,000 a month are charged a fee of 5 per cent, while the fee goes down to 3 per cent for any contributions over this level. In addition, an annual management fee of 1.5 per cent is charged.

So, if you invest the standard €304 a month, or €3,648 a year, the cost of running the fund alone will be €237 in the first year.

By the time you receive your bonus, therefore, you will already have spent more on charges than you will receive from the loyalty bonus.

Similarly, Zurich Life has an allocation rate of 95 per cent on its Savings Plus plan, which means that it takes 5 per cent of every contribution you make.

So, savings of €304 a month will lead to a charge of €182.40 a year. Moreover, the firm also imposes a policy fee of €3 a month, meaning an additional charge of €36 a year, which also rises in line with the consumer price index.

If you choose a fund that offers some form of capital protection, you will pay more in terms of management fees each year, as the protected range of funds has a charge of 1.75 per cent a year, compared to 1.25 per cent for Zurich’s Matrix range.

This could push total fees up to almost €300 a year, meaning that, in effect, you would lose one month’s contribution, or one-12th of your annual investment.

If you don’t think the aforementioned funds will provide returns worthy of such fee structures, you might consider some less expensive options.

At Quinn Life, there are no transaction charges on regular premiums, and annual management fees start at 1 per cent a year on funds such as its European and Irish equities, rising to 1.2 per cent for US, biotechnology and technology funds. So, charges for annual savings of €3,648 will come to between €36.48 and €43.77.

If you invest with RaboDirect before the end of the year, you will not have to pay the usual 0.75 per cent entry fee, while the provider does not charge a contribution fee. But you will have to pay annual management charges of between 0.7 per cent and 2 per cent.

It is also possible to access Zurich Life’s funds by a cheaper distribution method.

Investandsave.ie, an online execution-only broker, allows you to make monthly contributions to 27 of the firm’s funds for just a 1 per cent annual management fee – there are no allocation or administrative charges.

However, you must first invest a minimum lump sum of €5,000 and save a minimum of €100 a month thereafter.

THE GOVERNMENT GUARANTEE

Given the current environment, it is worth reiterating which banks are covered by which guarantee, and by how much your deposits are protected.

Firstly, it is only deposits which are covered by the various guarantee schemes.

Investment funds are covered under the Investor Compensation Scheme, which offers compensation to clients of investment firms that have been forced to go out of business.

If you are looking for 100 per cent protection on all your deposits, there are nine institutions covered by the Government guarantee, which is due to run until September 29th, 2010.

The institutions in which all deposits are guaranteed are: AIB; Anglo Irish Bank; An Post; Bank of Ireland; EBS Building Society; ICS Building Society (the Mortgage Store); Irish Life Permanent (Permanent TSB); Irish Nationwide Building Society, and Postbank Ireland Ltd.

For other institutions, the Deposit Guarantee Scheme, which guarantees 100 per cent of deposits up to a maximum of €100,000, applies.

It covers Irish branches of foreign institutions such as: ACCBank; Bank of Scotland (Halifax); First Active; KBC Bank Ireland plc (IIB Bank plc); Pfizer International Bank Europe; Ulster Bank, and National Irish Bank.

Institutions that operate in Ireland but are regulated in their “home country” are covered by the guarantee offered in their home state.

Deposits with British institutions Nationwide and Northern Rock are covered by up to 100 per cent of the first £50,000 (€55,400). Deposits with RaboDirect are covered by the Dutch guarantee scheme, which guarantees €100,000 per person, per bank.

While it is included in the Irish Deposit Guarantee Scheme, National Irish Bank, a subsidiary of Danske Bank, is also covered by the Danish scheme, which offers protection on €50,000. This will increase to €100,000 by October 1st, 2010.

What is the real interest rate on offer?

AS BANKS seek to boost their deposit bases, a rash of advertisements has appeared offering standout headline rates on lump-sum deposits.

AIB, for example, is advertising a “savings rate to grab your attention” of 10 per cent, while Halifax is using actor Colm Meaney to promote its 7 per cent fixed-rate savings account, and EBS has “fixed savings worth jumping at”, at a rate of 4.3 per cent.

If you’re looking for a home for a lump-sum deposit, at first glance, AIB’s offer looks like the best option.

But read a bit closer and you’ll see that Halifax is actually offering the highest interest rate. This is because its product has a higher annual equivalent rate (AER), which shows you what the interest on a savings account would be if the interest was compounded and paid out to you each year (instead of monthly or over any other period).

You should note that if you do not keep your money invested for as long as a year, you may earn less than this rate.

AIB’s 10 per cent fixed rate runs over three years and offers an AER of 3.226 per cent, while EBS’s scheme has a term of 18 months and an AER of 3.43 per cent.

Halifax’s 7 per cent rate is fixed for two years, indicating an AER of 3.44 per cent.

Under the Consumer Protection Code, financial institutions are required to state clearly the relevant interest rate for each term, quoted together with the AER for each rate.

This is the rate you should be looking at, rather than the attention-grabbing headline rate.