Money Times - April 11, 2017

Posted by Jill Kerby on April 11 2017 @ 09:00


It’s hard to imagine a less consumer friendly sector than banking (water utilities perhaps?)

Nine years after the bank collapse, revelations continue about how the retail banks treated their mortgage customers. The Central Bank is now in discussion with the Gardai about the personal culpability of individual bank officials in what is now being alleged to be the outright theft of c10,000 low cost tracker rates from as early as 2006, though few expect any successful charges and convictions.

Meanwhile, bank and post office branches continue to close – Ulster Bank being the latest to announce another 22 branch closures and 40 post offices are slated for closure. This past week another bank cut its savings rates in the relentless downward spiral to zero or even negative returns.   

The bank closure campaign is happening everywhere. On-line and cashless  banking is now the ultimate intention of global financial institutions (perhaps with the exception of Irish credit unions which have always lagged behind technologically) in order to drastically reduce costs and rebuild their shattered balance sheets.

Fighting against the new IT dynamic is probably fruitless, at least so far as private banks are concerned and consumer campaigns should really be directed at keeping post offices open, but with expanded services that ideally would include acting as bank proxies and in encouraging the advancement of credit union services.

Until the credit unions are restructured, with their bad debts and bad lending practices fully purged; re-training and mergers completed, and there is a proper roll-out of essential banking services (current and saving accounts, debit and credit cards, on-line access to accounts, mortgage as well as business and personal lending), bank customers in villages and towns where closures are happening have little choice but become proficient on-line banking customers.  Depending on where they live and the availability of ATM machines or merchants that allow cash top-ups on purchases, most of their purchases will probably also be cashless.

Not everyone is comfortable with cashless banking – but the cost and risks associated with cash-dispensing post offices means that even pensioners and social welfare beneficiaries are going to have to get used to cashless services. (Cashless is already the norm at KBC Bank which doesn’t even accept cash deposits.)

Meanwhile, last Friday (April 7) KBC Bank was the latest bank to cut its demand interest rate, dropping it to 0.05% from 0.15%. 

It is hard to believe that this is still one of the higher deposit rates on offer: Bank of Ireland, AIB and Ulster Bank have reduced their demand rate to zero and 0.01% respectively. You might get a fraction percentage higher if you open an on-line account only, say with RaboDirect that is offering 0.04% but no matter what extra fraction of a rate you get, the automatic 39% DIRT (unless you earn pension incme of less than €18,000 of an individual or €36,000 for a married couple) will leave you with an insignificant return, even on a substantial deposit.

In a recent blog, the excellent bonkers.ie which compares deposit and current account rates, noted that a demand rate of 0.05% means that someone putting €10,000 into such an account will earn interest of just €5 at the end of 12 months. The 39% DIRT tax means you get a net sum of €3.05. At 0.01% interest the person with €10,000 on deposit would earn a laughable €1.

Bonkers.ie suggests that a flexible, strategic approach is the only way to achieve any kind of return. “Despite the continuing cuts, there are still decent returns available, if you know where to look and are willing to adapt to certain restrictions,” it reports. “For example, EBS’s Family Saver Account currently offers a [annual] rate of 3.00%, but it requires you to contribute monthly and has a maximum monthly contribution of €1,000.

“For lump sum savers, the rates aren’t as attractive, unfortunately. At the time of writing, KBC's 12-month fixed rate account is offering a return of 0.80%, which will give an after-DIRT return of €48 on a lump sum of €10,000 locked away for a year. Permanent TSB is offering a 0.75% rate for lump sum savers.”

State Savings products should also be included in your list, but is it worth locking in your money to achieve a slightly higher fraction of a return?  For example, the current tax-free annual return on the 4 year National Solidarity Bond is just 2% or 0.5% per annum. The 10 year Bond pays a cumulative tax free rate of 16%, or just 1.5% per annum.

You may not feel comfortable about voluntarily giving the Irish state the loan of €120,000 for 10 years (the maximum amount an individual can leave in this Solidarity Bond) but the State promises to pay a net return of €2,400 (€600 per annum) plus the €120,000. Something no bank or credit union can match.


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