The sharp rise in saving rates during the pandemic – combined with a lack of appetite for riskier propositions – means there was some €155 billion on deposit by retail savers in March 2024, according to the Central Bank.
And the bulk of this was in instant access accounts, earning an average of just 0.13 per cent.
So, rather than earning paltry returns, could these savings be put to the benefit of both the economy and the savers?
As suggested in a recent consultation process, should the Government be looking to enhance the proposition for savers by introducing more tax-incentivised savings-scheme options such as the UK’s ISA scheme?
State of play
Despite the sharp rise in interest rates at a European level – or at least until earlier this month, when rates started to fall again – Irish savers continue to lag the benefits enjoyed by their European peers. Figures from the Central Bank show the household overnight rate stood at just 0.13 per cent in February 2024 – compared with a euro-area average of 0.4 per cent and a rate of as much as 1.6 per cent in Luxembourg.
No wonder, then, that Minister for Finance Michael McGrath recently noted that household deposits are “largely asleep”, earning “little or no return” by sitting in “instant-access, overnight or current accounts”.
So what can be done? One approach, as was suggested as part of the consultation process around the wider funds sector, is to develop “a tax-free/tax-advantaged retail savings and investment product”, along the lines of the UK’s individual savings account (ISA), or Sweden’s investment savings account scheme.
Twenty-five years of the ISA
In 1999, the then chancellor of the exchequer, Gordon Brown, ISAs with the aim of boosting savings among the population, particularly those on low incomes.
Each year the government sets an allowance; at launch, you could save just £7,000 (€8,279) into such an account – it has since risen to £20,000.
This money can be split across four types of investment: a cash ISA; stocks and shares ISA; lifetime ISA and an innovative finance ISA.
As UK financial services company Hargreaves Lansdown (HL) notes, you could “put £5,000 in a cash ISA, £4,000 in a lifetime ISA and the remaining £11,000 in a stocks and shares ISA” over the coming tax year.
It’s an attractive product, if you get the investment proposition right, figures from global fund giant Vanguard suggest that someone who invested their whole stocks and shares allowance every year since 1999 would now be sitting on a nest egg of almost a staggering £900,000.
A cash ISA is similar to a regular savings account, but you won’t pay tax on interest. Typical UK accounts are currently paying interest of about 4.5 per cent.
When it comes to stocks and shares, investing through an ISA allows you to do so free from UK tax, as there’s no tax to pay on dividends, interest or capital growth. HL’s option, for example, allows you to invest in more than 3,000 funds, UK and overseas shares, investment trusts, bonds and ETFs, with an annual charge of not more than 0.45 per cent. You can open an account from as little as £100, and pay in just £25 a month.
A lifetime ISA is slightly different, in that it has a maximum allowance of £4,000 this year – but the kicker is that the government will top this up by 25 per cent. So then, like our own old special savings incentive account (SSIA), for every £4 you save, you get £1 extra – or up to £1,000 per tax year.
The bonus is aimed at helping people save to buy a home, or for retirement, and as such only those aged between 18 and 39 are eligible. However, once you open it, you can keep paying in until you turn 50.
It means that someone saving for 19 years, for example, will be entitled to a bonus of some £19,000. If you don’t take the money out to buy a home (valued at up to £450,000), you can leave it until you’re 60 – otherwise you’ll likely face a charge of some 25 per cent. Lifetime ISAs can be left in cash or invested.
Finally, with an innovative finance ISA, your money will go towards peer-to-peer loans, which allow for greater rates of return than deposit accounts – but at much greater risk.
In addition to the above, the UK also has a specific product aimed at saving for your children. With a junior stocks and shares ISA you can allocate up to £9,000 each year to an account on behalf of your child aged 18 and under.
The Swedish approach
The UK is not the only country with such a product. Sweden’s investment savings account, Investeringssparkonto (ISK), is also aimed at individual investors and allows you to save in stocks, shares and other types of securities. Like the ISA, there is no capital gains tax (CGT), although you will pay an annual standardised tax.
It was introduced in 2012 with the goal of simplifying investment for average investors – it does this by replacing CGT with an annual standardised tax, which can be no lower than 1.25 per cent.
So, no tax forms or self-assessment burden then – and you get to keep more of any gains.
How would it work in Ireland?
It’s unlikely, should a new savings scheme be introduced, that it would be similar to the SSIA of old. But would it be like the UK’s ISA?
Already, we have something akin to a cash ISA – tax-free savings via the State savings scheme. Sold via An Post and managed by the National Treasury Management Agency, no Dirt is payable on interest earned in such a product. These range from prize bonds to regular savings to fixed-term deposits to the 10-year solidarity bond.
All these savings products are also protected 100 per cent by the State – the difference perhaps, is the rate of return on offer. While the best ISAs in the UK offer about 5 per cent (with Bank of England rates at 5.25 per cent), in Ireland, the best you can hope for with the State savings scheme is about 2 per cent a year (with European Central Bank rates at 4.5 per cent).
The equity type ISA option may already be on the way in Ireland, given current discussions around ending deemed disposal. At the moment, if you invest in an equity fund, you would likely have to pay tax owed on any gains generated every eight years. This impacts on the capital growth potential of the product, and thus would be a boon to investors if removed.
What about a lifetime ISA then? Given widespread support for both home ownership, and increased private pension provision, across the political spectrum, a product that is aimed at “generation rent”, such as those as in the UK example, aged between 18 and 39, would likely be an electorate-grabbing incentive.
The concern, of course, would be that like the SSIA, which matured as the Celtic Tiger was roaring, such savings schemes could exert an upwards pressure on house prices and thus mitigate their benefits.
‘Ireland’ savings
Or, given McGrath’s comments on putting Irish savings to “more productive use in the economy, investing in structures that help to fund and support early-stage and innovative businesses”, a possible change in the UK ISA structure may be of interest and may be something that could be replicated here.
In April, current UK chancellor Jeremy Hunt announced plans for a “British ISA”. The aim of this was to encourage investment into UK companies with an additional tax-free limit of £5,000, bringing the overall total up to £25,000. While it’s not exactly clear what this will mean in practical terms, it’s likely to cover investment in UK headquartered/listed companies.
There have been criticisms of this approach, however. As noted by Proinsias O’Mahony in his Stocktake column in The Irish Times, FTSE 100 companies, which don’t have operations in the UK, could be included in the scheme, while international ones, with substantial UK presences, such as Google, won’t be.
From an Irish perspective, an over-reliance on domestic-focused assets is rarely a good thing, as those who were overweight in Irish banks ahead of the financial crisis of 2008 onwards will easily attest to.
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