Is your deposit making cents?

Let’s face it, it’s not a great time to be a saver at the moment. Any of you who have been shopping around for the best deposit rates in recent months will have noticed a very sharp correction in rates over the past 18 months. It’s somewhat of a perfect storm for deposit rates at the moment with a combination of factors conspiring to keep them down. Falling ECB Base rates, government tax policy and the deleveraging of Irish banks all mean that the current low interest rate environment looks set to continue for 2016 and further.

The European Central Bank (ECB) has steadily reduced its base interest rate over the past 5 years from 2.5% to 0.05%; and in a recent statement indicated it was willing to make possible further cuts.

It’s not just the ECB that’s dis-incentivising savers, the Irish government are playing their part too. The rate of DIRT is at a record high of 41%, and then you need to consider the addition of 4% PRSI for some savers. You will be liable to the additional 4% PRSI tax if your deposit interest exceeds €3,174, as Revenue would consider you to be a chargeable person. You must pay and file under the Revenue’s self-assessing system. For some savers, the rate of DIRT has now more than doubled to 45% (DIRT & PRSI) from the 20% which was being levied in 2007 before the financial crisis

 Aside from the ECB rate cuts, other factors have also driven down deposit rates. A number of years ago Irish Deposit rates were artificially high, most of the domestic banks were facing severe funding pressure and as a result were propping up their deposit books by offering unsustainably high deposit rates, in some cases a full 3% above the ECB Base rate. However, this is no longer the case, these same banks have been deleveraging by selling off loans and as a result no longer face the same funding pressure.


Inflation is always a threat in a low interest rate environment, your net return needs to consistently beat the prevailing rate of Inflation in order to get a real return on your money. Fortunately, the inflation rate is very low at the moment. However, over the 10 year period from Dec 2003 – Dec 2013 the average inflation rate in Ireland was 1.7% pa, whilst over the same period the average return from cash was 1.5% pa. The long term target inflation rate across the Eurozone is 2%, which means leaving your money on deposit for the long term will most likely erode its real value over time.

Despite these historically low rates, for many consumer’s security of capital is still more important than return, which is why so many still favour deposit accounts as a home for their money. There are still billions of Euro on deposit in Irish banks earning virtually nothing. Recent figures from the Central Bank show that Irish households had more than €40 billion on deposit, earning an average interest rate of just 0.24%. The last 5 years saw a rush to safety, the artificially high deposit rates offered by Irish banks combined with the blanket government guarantee meant that too much money remained in this safe haven. A 2015 survey by Irish Life showed that 3 in ten respondents guessed wrongly when asked what the typical rate of return is on deposits. The survey also showed that a quarter of our wealth is held in deposits, three times as much as in Canada and twice as much as the UK.

So, where to now for all of those customers who have remained on Deposit earning 0.24% returns?

The first step before deciding to move from Deposit is to ask yourself whether you’re a long term investor or a short term saver. For example, if you are 40-years old and have €150,000 in savings, you would be well advised to take your money out of a deposit account and explore your long-term investment options. Otherwise, your savings will be eroded in the long-term through inflation. However, if you’re a 25-years-old and saving for your first mortgage or new business start-up, then a deposit account may be a viable option. It all depends on your short- and long-term financial objectives.

Whatever your situation, it looks like this low interest rate environment will continue for a number of years. Seeking Independent financial advice is a must for anyone considering moving off deposit.

It pays to make yourself fully aware of your long-term investment options.

Gerard O’Brien LL.B LL.M CFP®QFA is the Owner of Heritage Wealth, a Financial Planning practice based in Main Street, Midleton, Cork. 083 4662040