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Passing up the chance for a risk-free return on your savings is madness

Simply by moving money to notice accounts or fixed term deposits, you can improve your return by up to a factor of 30

Savers are turning their backs on the chance to earn better returns on their savings by leaving them all in instant access accounts. Photograph: iStock

Dominic Coyle's face
Dominic Coyle
Fri May 10 2024 - 09:37

Welcome to the latest edition of our On The Money newsletter. This week, we’re talking savings.

Consistent reader interest in articles on consumer finance shows the demand that is out there for advice on how best to manage your money. But then you look at the situation with bank deposits and you have to wonder if the message is getting through.

When even the banks are highlighting the fact that they are making more profits because people are passing up the chance for a better return on their savings, you know it’s time for a wake-up call.

At the end of last year, AIB and Bank of Ireland held around €60 billion of our money on deposit at the Central Bank. At the current European Central Bank deposit rate of 4 per cent, they would be getting €2.4 billion annually in interest on that money – for which they are paying us, on average, €78 million. That’s a tidy profit for the banks of over €2.3 billion for doing precisely nothing.

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And that’s not the whole story. Central Bank figures for February show that Irish households have €154.5 billion in total on deposit with the banks. Apart from the money lying in the Central Bank, the banks use some of our savings to fund lending to other customers. March figures published by the Central Bank yesterday, show the average interest rate on a new mortgage was 4.31 per cent while the overage overnight deposit rate was 0.13 per cent. That’s even more profitable for the banks than leaving the money in the Central Bank.

Largely because of customer inertia, Ireland’s banks are charging more for mortgage lending than the average across the euro zone (4.31 per cent versus 3.84 per cent) and giving us less on our savings (0.13 per cent in Ireland compared to 0.39 per cent average across the euro zone). That’s a return of little or nothing.

If you look at what the individual Irish banks are currently offering customers for demand deposits, AIB is the most generous of the three remaining. It will offer you an interest rate of just 0.25 per cent. Over at Bank of Ireland, the rate is an even more derisory 0.1 per cent but even that is better than the 0.01 per cent you can expect at PTSB, as Permanent TSB is now rebranded.

To put that in real money terms, if you are fortunate enough to have €10,000 in savings in a standard demand deposit account with any of these banks, you will get €25 in interest over a full year at AIB, €10 at Bank of Ireland and just €1 at PTSB. And that’s before the State takes a third of that in deposit interest retention tax (DIRT).

The situation is so exceptional that even the banks themselves have been drawing our attention to it. As far back as the middle of last year, explaining his bank’s outsize profits, Bank of Ireland chief executive Myles O’Grady said: “Customers have been slow to move their savings from essentially non-interest-bearing to interest-bearing rates”.

Over at AIB, chief financial officer Donal Galvin said the shift by borrowers into higher rate savings products “has been a little slower than we would have imagined”.

Things have improved over recent months, but only marginally. At the end of last year, even as banks were slowly offering better terms on fixed term savings, as much as 95 per cent of household deposits were still in instant access or demand deposit accounts.

The most recent figures, for March, show that figure has dropped to fractionally under 90 per cent – the third month in succession that it had fallen, with Goodbody economist Dermot O’Leary characterising it as a “slow and steady shift in household deposit to term accounts”.

But, in the circumstances, it is still exceptionally high. When you consider that the 0.13 per cent figure is actually a seven-year high; it is hard to escape the conclusion that a very large proportion of Irish consumers are patsies for the banks.

Rates on offer

People have rightly pointed out that better value is available to Irish savers by moving their money abroad. With the average overnight savings rate across the euro zone being more than three times the Irish rate, it is clear that many banks across the euro zone offer far more competitive interest than our banks – with the same access to the €100,000 per bank guarantee or thereabouts to protect our money.

A quick check shows that, even limiting yourself to banks with an A credit rating (above that of the Irish banks currently), you can get a return of 1.76 per cent on instant access savings with Sweden’s TFBank, with a protection guarantee on up to €90,000 of savings.

Including banks with credit ratings similar to the Irish banks would allow you access a rate of 3.03 per cent at Norwegian Bank Morrow that says it guarantees savings up to €100,000.

But the evidence suggests there is some residual reluctance among Irish savers to move money to banks outside the State, especially those operating largely online. If that is the case, fair enough, but even if you are confining yourself to the Irish banks, you can still do noticeably better with your money.

Let’s go through the banks one by one. Starting with AIB, simply by agreeing to give seven days notice of any intended withdrawal, you can treble your return to 0.75 per cent currently.

Lock the money in for a relatively short period and you will do even better. The bank’s six-month term deposit offers an annualised rate of 1.75 per cent, with that offer rising to 2.5 per cent for those happy to lock their money in for a year, or to 3 per cent per annum if you leave it there for two years.

The main drawback for those with more modest savings is that AIB’s fixed term offer is open only to those with at least €15,000 to invest.

Over at Bank of Ireland, as long as you have at least €5,000 in your savings account, you can turn that demand deposit rate of 0.1 per cent into 1 per cent by committing to give a month’s notice.

Its fixed term accounts are more flexible than those in AIB, allowing you to withdraw up to a quarter of your money during the lock-in period. If that works for you, you can get an annualised return of 1.5 per cent on a six month fixed term, 2 per cent if you leave the money there for a year and fractionally less than that for a two-year account.

PTSB is also offering 1 per cent on its notice account though you will have to given 40 days notice of withdrawal. People opening a regular saver account rather than simply lodging a lump sum can access a 2.5 per cent return on balances up to €50,000.

It offers a wider range of fixed term options with the same €5,000 access threshold as Bank of Ireland. Rates on offer vary from an annualised rate of 1.75 per cent if you agree to leave the money untouched for six months to as much as 3 per cent per annum for a three-year lock-in.

In between, you will get 2 per cent per annum on a 12-month deposit account, 2.5 per cent per annum on an 18-month option and down to 2 per cent annually again if you are happy to leave your money there for five year.

As in the other product categories mentioned earlier, the Irish banks’ offerings on fixed term deposits are less generous than those available across the euro zone as a whole – an average interest rate of 2.51 per cent versus the 3.16 per cent available across the wider bloc.

And with the ECB deposit rate at 4 per cent, the banks are still making money off you on any of these products but at least you are getting to share in some of that reward, with the returns on offer being a multiple of what is available on instant access accounts.

The whole point of savings is that it is money we do not anticipate having to access in a hurry so, for most people, there should be no reason they cannot move most of their savings into a notice account or a fixed term deposit – or split it between the two types of account.

And remember, there is nothing that says you have to keep your savings at whatever institution hosts your current account.

The bottom line for consumers is that there is no pressure on the banks to really improve the rates being offered either on term deposits or instant access accounts as long as customers stay put.

You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.