Deposits, interest rates, savings and inflation

[R De B]

Hello, I have been looking into savings accounts here and abroad. The interest rates being offered by Irish banks and credit unions come in at less than 2% and no dividends, while even pensions are returning around 4%, which is barely competitive with normal inflation. Inflation is predicted to hit 8% before long and whether that properly represents real inflation or through rose coloured glasses is another question.

UK and EU banks meanwhile offer more than 6% for short term savings accounts and 4% mid term, from my research, while their pension funds, and those in the US, seem to return more than 7% depending on where you look.

So how can an Irish person protect their savings? Even property as an investment is a very dubious prospect with the possibility of a government building programme coming shortly as well as landlord-hostile legislation. I ask also for various elderly relations who might have large lump sums saved up.

Thanks.

 

[Brendan Burgess]

There is no risk-free option for your savings.

Inflation is the biggest risk and affects cash on deposit most.
While shares and property are also affected by inflation, over the longer term, they are less risky, as they usually exceed inflation.

If you put your money on deposit in the UK or the USA to avail of higher deposit rates, you will face currency risk.

If you have a mortgage, you can overpay it which gives you a tax-free, risk-free and charges-free return on your money equal to the mortgage rate.

In general, the best investment in terms of lower risk and higher return for the long-term is a diversified portfolio of shares. But many people are scared by the volatility of such investments.

Brendan

 

[ClubMan]

even pensions are returning around 4%

That's a meaningless figure without some qualification/context. E.g. what pensions? invested in what assets? over what time period? And don't forget that pension returns are tax free within the pension vehicle and contributions benefit from generous tax relief.

 

[NoRegretsCoyote]

Inflation is predicted to hit 8% before long and whether that properly represents real inflation or through rose coloured glasses is another question.

Retail deposits tend not to return above inflation over the long or even medium term.

Since I've beenn saving (1987) I would say approx 2009-2013 was the only period that inflation-adjusted, post-DIRT rates were positive.

 

[commentquery]

I understand Exchange risk applies to savers here investing in the UK. But can someone give a proper example. Here is a simple one :
HSPB offer 3.25 on 1year fixed term. PTSB offer 1.0 on 1year. Say €/£ xrate = 0.9. Invest 100 € or 90£ I year later the corresponding sums are 101€ and 92.93£. For the UK return to be same the xrate would have to be 92.83/1.01 which is 92. This is a considerable devaluation of sterling. This simple example ignores Spread on Xrate and also Tax treatment. Would the Stg interest be treated same as € interest. What is the proper answer - worth the risk ?

 

[Connard]

I understand Exchange risk applies to savers here investing in the UK. But can someone give a proper example. Here is a simple one :
HSPB offer 3.25 on 1year fixed term. PTSB offer 1.0 on 1year. Say €/£ xrate = 0.9. Invest 100 € or 90£ I year later the corresponding sums are 101€ and 92.93£. For the UK return to be same the xrate would have to be 92.83/1.01 which is 92. This is a considerable devaluation of sterling. This simple example ignores Spread on Xrate and also Tax treatment. Would the Stg interest be treated same as € interest. What is the proper answer - worth the risk ?

That is a 1% change roughly which over the space of a year is definitely possible. Just look at this chart. Sterling went from .83 to .88
in a year. That is a 6% change.

Euro to British Pound Exchange Rate Chart | Xe

EUR to GBP currency chart. XE’s free live currency conversion chart for Euro to British Pound allows you to pair exchange rate history for up to 10 years.

www.xe.com

 

[NoRegretsCoyote]

For the UK return to be same the xrate would have to be 92.83/1.01 which is 92.

It's not so much the mid-point as the range.

Even if there is no expected deprecation, just assume that via a coin toss your €103.25 after interest will be either 10% appreciated or 10% depreciated.

	Heads (appreciation)	Tails (depreciation)
Invest in sterling	€113.58	€92.93
Keep in €	€101	€101

The expected value of investing in sterling is of course higher, but most people are loss-averse and a 10% loss hurts more than the benefit of a 10% gain.