Money Times - February 27, 2018

Posted by Jill Kerby on February 27 2018 @ 09:00



Something is very, very wrong in the banking system when you deposit €10,000 with a lending institution (a bank, building society, credit union) for 18 months and they repay you – at the most – a 0.65% return. (Five years ago you could get a 3% gross annual return, 10 years ago, as much as 4.5%.)

Once the government takes its pound of flesh, aka DIRT tax of 37%, you are left with net interest of c€41 from that €65. Meanwhile, the bank could be charging someone who borrows your €10,000 up to 10% compound interest.

Well, that ‘Something’ just got worse.

On May 16, RaboDirect, the Dutch A+ rated bank and still considered to be one of the safest banks in Europe, will shut its doors - and vaults – for good to its remaining 90,000 retail customers who collectively have €3 billion under deposit.

The Dutch have been winding down their activities here for the last few years – I used to have a current account with them -  and now Rabo’s depositors are being turned away.  But where will they go?

With such a limited field of deposit takers, anyone with a large sum of cash that they especially need for boosting their income, should be checking all their options, or resign themselves to guaranteed losses once DIRT and inflation is factored in. (Over 65s whose gross income is less than €18,000 a year or €36,000 for a couple are exempt from DIRT.)

If you are happy to make your own arrangements, then the least you should do is consult a good on-line comparison site like www.bonkers.ie which provides up-to-date tables of deposit accounts and breaks down those choices according to the type of account you want – easy access (ie, a demand account), a notice account (in which you must give say, 30 days or 60 days notice for withdrawals) or a term deposit account of, say, one to five years.

You can further narrow the result according to whether you have a lump sum to deposit or are a regular saver. Bonkers even gives you the banks’ credit rating, if that is important to you – and it should be. The only A, let alone A+ rated bank in Ireland has, up to now, been RaboDirect;  all the others are B-rated, ranging from BBB for Ulster Bank, BBB- for KBC Bank and Bank of Ireland, BB+ for AIB and BB- , the lowest rating, for PTSB. 

Credit ratings agencies like Standard & Poor’s, Moody’s and Fitch were all discredited for their role in the 2008 financial meltdown, so even these ratings need to be taken with a pinch of salt. However, in the next banking crisis, depositors will be expected, like bank shareholders, taxpayers and bondholders to contribute to any “bail-in” to save the banks. They remain “too big to fail”, no matter the cost.

The €100,000 bank deposit guarantee still applies, and no one should leave more than that amount on deposit in any institution, but as the Cypriots, and later, Greek depositors discovered, when a catastrophic banking failure occurs, all the conventional practices – like ‘easy access’ to your savings and capital bank guarantees - are only worth what the central bankers say they are worth.

Having the deposit rate facts before you – via up-to-date tables – is important and will help you squeeze every available cent of interest out of your savings. But until the interest rate cycle turns in the eurozone even this effort will be very limited.

Interest rates are finally turning upward in the United States, Canada, Australia and the UK because the cost of living and wage inflation is beginning to tip over the 2% mark – that so-called perfect, Goldilocks figure to which central bankers (easily the most discredited economic forecasters after credit rating agency analysts) are so devoted. Raising interest rates, they claim, will stop these economies from overheating, stalling and falling back into recession.

Really?  Many commentators think rising interest rates are more like to cause another downturn (as debtors find themselves unable to meet higher repayments.)

Instead of trusting these Masters of the Universe (again) to protect your financial interests you need to act in your own interests.

To depend on a single asset – like cash – for long-term financial security is as much of a mistake as putting your faith in the stock market or becoming an amateur property investor or landlord.

If you are worried about your shrinking deposit options, engage an independent financial adviser to help you improve your savings yield, reduce any deposit or bank security risk, explore safe investments with risk levels you can live with.

A good adviser even ensure that you are not paying unnecessary DIRT (or income tax) and that you have claimed all your tax deductions and refunds. And don’t be surprised it they recommend the tax-free Rent-a-Room Scheme as the single, least risky income booster of all.

The TAB Guide to Money Pensions & Tax 2017 is available in good bookshops. See www.tab.ie for ebook edition.

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