The Irish savings paradox: A nation of savers, but not savvier savers
The Irish are known for their frugality and their penchant for saving money. But are they saving wisely? The answer, it seems, is a bit of a paradox. While Irish households have a substantial amount of money on deposit with banks, the majority of it is earning virtually nothing, trapped in low-yield current accounts. This is a problem, as inflation is eating away at the value of these savings, and the interest rates on offer are barely keeping pace with the rising cost of living.
The situation is particularly dire for those with lump-sum savings. AIB, Bank of Ireland, and PTSB offer a meager 0.25%, 0.1%, and 0.01% interest rate, respectively. This means that those with money in these accounts are actually losing value at a rate of more than 3% between now and next June. It's a stark reminder that simply having money in a bank account doesn't guarantee financial security.
There are some better options available, such as the Bank of Ireland's 3% rate on regular monthly savings of up to €2,500. However, this rate drops to just 0.5% once savings reach €30,000, and the deposit interest retention tax (Dirt) will cut the interest by one-third. Raisin Bank offers a competitive 3.1% return on sums up to €100,000, without the need to lock in a fixed term. But savers must file their own tax return, as Raisin does not deduct Dirt at source.
The government is also planning to introduce a new savings scheme, designed to make investing easier and more transparent. The aim is to help Irish consumers move their cash from poorly performing bank accounts to more lucrative managed funds. The scheme will likely be modeled after the Swedish model, which sees savers spared regular capital gains and income taxes, and face an annual charge based on the total sum saved above a certain limit.
The Irish public seems to be receptive to this idea. A survey by Royal London Ireland found that almost three-quarters of Irish adults are open to investing for long-term wealth-building, rather than relying on low-interest cash deposits. One in five said they would definitely invest, while 54% said they would possibly consider it. The barriers to investing, according to the survey, are less about fear of losing money and more about access to information and feeling informed enough to make a decision.
The ECB's recent interest rate increase has also highlighted the need for Irish savers to re-evaluate their financial strategies. While rates of 3% or slightly more are currently available, this might increase over the coming weeks, especially if the ECB hikes rates again in July. It's a good time to review where your cash is sitting and whether it is working as hard as it should be.
Daragh Cassidy, of price comparison and switching website bonkers.ie, suggests a three-time horizon approach to savings. Short-term savings of up to three years are best kept in deposit accounts with guaranteed protection up to €100,000 per institution. Medium-term money, from four to 10 years, may benefit from a blend of deposits and investments, as inflation becomes a greater risk than volatility. For long-term savings of 10 years or more, a structured investment strategy appropriate to your risk profile will almost always outperform cash over time.
In conclusion, the Irish savings paradox highlights the need for a more sophisticated approach to saving. While the Irish are good at saving money, they need to be more savvy about how they save it. The government's new savings scheme is a step in the right direction, but it's up to individuals to take control of their financial future and make the most of the opportunities available to them.
