Where to go with savings as interest rates remain low

I talked to farmers this week wondering if the move towards negative interest rates was going to be an issue for them.

It’s fair to say that, for the majority, it’s not an issue as they are either investing on-farm in terms of extra slurry storage or land, which in effect makes them even more asset-rich and cash-poor.

In addition, some were partially retired from farming with a son or daughter taking up the reins, and hence had no big cash pile that is getting smaller with negative interest rates.

However, many of the farmers I talked to had family members, brothers and sisters that were going to be affected by negative interest rates and were keen to understand what is going on.

Many wanted to know if negative rates for all savers were on the way as they had family members who they were often urging to save rather than spend.

Farmers were more keen to know if savings were going to earn more money, but all the experts say that for the foreseeable future it looks like interest rates will remain at very low rates.

COVID-19 deposit bounce

The data shows us that during the COVID-19 pandemic, more money has been put aside, with Irish customers putting over €13bn into banks and credit unions all around the country, meaning over €120bn is on deposit in Ireland.

Getting back to the reasoning behind the negative interest rate, it is that the banks have been paying the European Central Bank to hold the funds that have not gone out to borrowers since mid-2014. Initially, the banks took the hit themselves but now they are passing it on to customers.

Both of the main pillar banks are moving to negative interest rates on deposits with a threshold of €1m

Credit unions, businesses and pension funds have been paying negative rates on deposits of about -0.65% to -1%.

Bank of Ireland has been charging negative interest rates on deposits for large customers since 2016, while AIB has been charging negative rates for those businesses with more than €3m on deposit. Both of the main pillar banks are moving to negative interest rates on deposits with a threshold of €1m.

So what should farmers with money on account do?

All the experts say there are a number of other options worth considering – for example, investing in a managed fund. If you have a long-term saving goal, then placing the money in a life assurance investment policy (a managed fund) will mix your investment into stocks, commodities, property and bonds.

Like all investment products, the higher risk is with the share investments and the lower risk is with bond investments. Savers will be hit with life assurance exit tax of 41% on gains, fees and charges, so you need markets working with you in the right direction.

Markets can work against the fund as well, of course. As we discuss with the financial planners on the next two pages, the money will not be accessible at all times and you have to submit an encashment request.

The other one the planners talk about is paying down debt as the interest you’ll be charged on loans will usually be far higher than anything you’ll earn.

The pension, as discussed on the next two pages, is also an option.

The CSO recently warned that there are currently five people working to every one person over the age of 65

As readers will have seen in recent media articles, depending solely on the State pension into the future for retirement might not be the way to go. Whether it will be around in 10 to 20 years as it is increasingly unaffordable to fund due to our ageing population is up for debate.

The CSO recently warned that there are currently five people working to every one person over the age of 65. However, this is due to fall to 2.3 to one in 30 years’ time.

How do negative interest rates work?

Let’s say you have €100,000 on deposit with a bank. If it is charging a negative rate of -0.5% it means €500 would be deducted from your savings, bringing your balance down to €99,500. The same 0.5% would be taken the year after, etc.