Money Times - May 12, 2015

Posted by Jill Kerby on May 12 2015 @ 09:00



The single, common bone of financial contention with older people today doesn’t appear to be how much extra tax they are paying since 2008, or frozen pensions, or the high cost of healthcare - though all of those things are a worry.

It is what they perceive to be the extremely low return they are getting on their savings.

With the exception of a single rate hike in July 2008, the European Central Bank base rate has fallen steadily since then, from 4.25% to its current rate of 0.05%.

Neither savings or even tracker rates are that low, of course, and here in Ireland, savers are paid higher interest than practically any other Eurozone country (except Greece).

With the printing, by the ECB, of €60bn worth of euro every month until the end of next year interest rates, and certainly government bond yields were expected to continue to fall. They certainly did in March and April. 

But this is a story that changes by the day. As I write, German and other European bond interest rates have risen dramatically and there is growing concern that the great sovereign bond bubble that began about 30 years ago may finally be approaching its pin.

The complex bond markets don’t usually feature on the ordinary person’s radar. But as their prices have loomed, and the interest they pay falls, this market has an impact on every saver, whose deposit yield disappears, every debtor whose debt inflates away and retiree whose income for life shrinks.

These days, deposit interest is puny (just like tracker mortgage repayments.)

Back in 2008, Irish demand deposits paid as much as much as 5.25%, a 1% margin over the ECB rate of the day and as much as 8% for one or two year fixed rate accounts. Someone with €100,000 could expect between c€5,250 and €8,000 (albeit from the likes of Anglo Irish Bank or Irish Nationwide BS) annual gross income. The DIRT rate was just 20%.

Today, after seven years of central bank manipulation, the same €100,000 in an Irish demand or fixed rate deposit account might yield its owner, c€1,555 - €1,700 with a DIRT rate of 41%, not 20%. Meanwhile a tracker mortgage holder with a €100,000 loan and a 0.55% interest rate has a monthly repayment of €55. (Yes, €55)

Anyone buying a German government 10 year bond last month (like a pension fund which must invest in very safe assets) would only get 0.5% annual interest. Today, as I write, it – and most other Eurozone bonds- has risen to 0.7%. That may seem like a tiny jump, but not for the bond markets and you need to go back to 1999 to find this kind of sudden volatility in the German bund market.

An immediate consequence is that despite all the quantitative easing, which usually boosts stock market prices, as I write European stock markets are falling and the euro – which had sharply weakened in March and April against the dollar and sterling – has strengthened.

iAll this market activity might have reversed by the time your read this. But we are caught in an upside down, topsy-turvy financial world, dominated by an insatiable dragon:  Debt.

No wonder ordinary folk, clinging to their hard-earned life savings, are confused.

The single, common question I’ve been asked at my Active Over50s seminars (in Letterkenny last month, Killarney this past weekend) is how to get a better deposit return with as little risk as possible.

Aside from shopping around for the best short-term rate and being prepared to move cash around regularly, there is no simple answer. Cash itself carries real risks of devaluation and debasement, in the form of QE money printing (when it works); confiscation – if you keep more than €100k in any single EU bank and there is another ECB “bailout” (remember Cyprus); and inflation, whereby the % rise in your cost of living exceeds the % amount you earn in interest after DIRT.

So consider lessening those risks:

-       Don’t leave cash over €100,000 – the deposit guarantee - in any single bank/credit union.  

-       Choose a credit-worthy bank/credit union with a top-notch reputation.

-       Consider diversifying your assets, including cash, especially if they/it represents the bulk of your wealth. This is really important for pension fund holders who have many years before retirement.

-       If retirement day looms, larger holdings of cash and short term bonds means you are less likely to see a big collapse in your fund if the stock or long term bond market experience a big correction. Get a review from your pension trustee or adviser.

-       Consider buying a small percentage of gold/silver as catastrophe “insurance”. Unlike paper and ink money that can be intentionally devalued, debased, recalled or lost forever (paper burns), the coins and bullion you own are immutable. They answers to no third party once in your possession.

-       If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.      


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