Are you saving for a house deposit, a home renovation or a car? Maybe you’re adding to a rainy-day fund each month. Saving is great, but if your cash is in the wrong account, you’re losing out.
Irish people love a deposit account, the problem is not all deposit accounts love us back. Right now, there is up to a €700-a-year difference in what a €30,000 lump sum can earn in one accessible deposit account with an Irish bank versus an overseas online bank. So why are we so bad at switching?
“Irish banks simply don’t have to pay much money to Irish depositors because we are all far too willing to give them our money,” says Ralph Benson, head of financial advice at MoneyCube. “If that were to dry up, they would have to improve their deposit rates,” he says.
Even after Irish banks failed to pass on European Central Bank (ECB) interest rate peaks of recent years, costing Irish savers billions of euros in lost interest, we still keep giving them our money.
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Households now have a whopping €157.7 billion on deposit, according to Central Bank of Ireland figures. ‘Overnight deposits account for almost 90 per cent of total household deposits. This is the type of account where we can access our money quickly, without restriction or penalty, such as a current account or demand deposit account.
Not only are we routinely choosing low interest rate banks for our savings when better options abound, we are choosing their worst performing accounts, too. Do we really need instant access to such vast amounts of cash? We pay the price of hundreds of euros in lost interest every year. Your money may as well be in a cupboard.
We can blame Irish banks for not passing on interest to savers, but we can’t blame them for our own bad planning or inertia when we don’t switch.
Shake things up
Overseas online banks and banking platforms give Irish consumers easy access to good savings rates. Put a lump sum in some banks in the Netherlands and Germany right now and you’ll get hundreds more in interest than at home.
“If we en masse moved our money to another bank, I think Irish banks would have to cough up. It’s just that they have a really low cost of funding because we are such compliant citizens,” says Benson.
“It’s about adjusting to the new reality and looking beyond your typical institutions like the Irish banks and credit unions and An Post,” says David Looney of Alpha Wealth. “We find some of these online banks are giving the best interest rates for short-term deposits and accessible savings, but you need to look under the bonnet.”
Take Niamh, she’s saving for a house and already has €30,000 on deposit. The house purchase is probably another year or two away, so she could look at a better performing term deposit account. But she likes to keep her money close and keeps it in an Instant Access Demand account with Bank of Ireland, at a rate of 0.10 per cent.
Niamh tries to add €500 from her pay cheque every month, transferring it from her current account with the same bank. It’s satisfying to see her savings balance increasing, but it’s not increasing by as much as it could. Niamh is doing the right thing by saving, but she could be saving even more by using a different type of account, or the same account with a bank offering a better interest rate.
At the end of the year, Niamh’s €30,000 will have earned just €30 interest, or €20 after Dirt tax. Her money would perform little better with AIB and EBS instant access accounts, earning just €50 in interest.
She could do better, says Looney. A lot of the online banks are giving rates in excess of 3 per cent, he says.
“If you are getting a rate of 3.5 per cent, you have to pay 33 per cent DIRT on that, which takes the net return down to 2.35 per cent, but that still outperforms what you are getting in a lot of the main banks. It’s definitely worth looking into,” says Looney.
If Niamh does want to stick with an easy-access account, Dutch online bank Bunq would give her a lot more bang for her buck.
By switching to Bunq’s Easy Savings Personal Account at 3.36 per cent, also an instant-access account allowing two withdrawals a month, Niamh could have earned €1,008 in gross interest, or €675 after tax. That’s €655 more than in a similar account with Irish banks.
When you’ve grown up with Ireland’s high street banks, using an overseas bank can feel like a leap. But many overseas and online banks offer similar protections for your money.
“It might shock people that a lot of Irish banks are actually a B credit rating. People can get a better interest rate with a lot of these online banks which are A credit-rated institutions,” says Looney.
Deposits with Bunq are guaranteed up to €100,000. Bunq is an AA+ rated bank, Bank of Ireland has a BBB- rating and AIB’s rating is BB+.
Another option for Niamh is Revolut. It offers a higher rate of 3.49 per cent, but she will have to pay for a Revolut Ultra current account subscription of €45 a month.
The monthly fee might balance out if you are already paying current account fees elsewhere or have substantial savings. The maximum balance is €100,000.
For example, after tax and subscription fees, you would make €629 in interest on savings of €50,000 a year. Revolut is a CCC rated bank.
German digital investment platform Trade Republic offers 3.5 per cent gross return. It is regulated by Bafin and the Bundesbank and promises to pass the ECB deposit facility rate to its customers in full.
Niamh would earn €704 a year after tax on a €30,000 lump sum with Trade Republic. Deposits can be up to a maximum of €50,000 and are protected up to €100,000.
Trade Republic far outperforms even State savings with An Post where you would need to keep your money locked away for 10 years, says Looney.
“I know it’s guaranteed by the State and it’s tax-free, but it means tying up your money to earn just over two per cent a year, versus 2.35 per cent after tax with Trade Republic where there is easy access to your money,” he adds.
The downside of all instant-access accounts is that the rates are variable and can be changed – so you may not get a full term at this high rate.
Unlike Irish high street banks, which deal with the Dirt for you, choosing one of these overseas or online accounts mentioned means you will need to declare Dirt for which you will be liable yourself.
PAYE workers earning less than €5,000 from non-PAYE sources can declare Dirt income on their annual income tax return using Revenue’s myAccount.
Penny dropping?
Depending on the time frame of your savings goal, you need a place for your money to match.
“There is nothing wrong with having a certain amount of money languishing at no per cent – if that’s the price you want to pay for security and peace of mind then that’s worth doing,” says Benson. “It’s just a question of limiting that to a certain level,” he says.
Having enough savings in a deposit account for a biblical flood when all you needed was a rainy-day fund is a mistake.
“If €100,000 is what you have in the world and your rainy-day fund needs to be six months of after-tax pay, that’s fine – but suddenly you have €200,000. You don’t need to double your rainy-day fund. The extra bit can actually go into some assets that might grow you some wealth,” says Benson.
Too many of us are using deposit accounts to store money for long periods of time when the money could be working harder elsewhere.
There has been an increase in fixed-term deposits of up to two years, Central Banks figures show. Maybe we are wising up to locking our money away for a better rate. If you are comfortable with a two-year term, Irish banks’ rates for this can be better than their overnight deposit rates.
AIB is offering a two-year fixed-term deposit rate of 3.02 per cent on deposits of a €15,000 minimum, with no maximum. Niamh would earn €604 net on her €30,000 savings after two years.
Going through the German online savings and investment marketplace Raisin, Niamh could access a rate of 3.25 per cent with the Italian CA Auto Bank, part of the Crédit Agricole Group. The rate applies to deposits of between €20,000 and €100,000. Deposits are guaranteed up to €100,000.
Raisin allows Irish savers like Niamh to shop for some of the best rates in Europe. It’s been offering services in Ireland since 2019, targeting us due to Ireland’s poor interest rates. Savers can register with a valid ID by video call and then transfer the lump sum to Raisin. They, in turn, transfer funds to your chosen foreign bank.
After two years, Niamh would earn €975 gross interest, which after Dirt comes to €651. That’s €47 more than AIB’s offer.
Choose the term of your fix carefully, says Benson. “The benefit of locking up money can be very small versus the downside of breakage [fees] if something happens,” he says.
CA Auto Bank through Raisin also offers a six-month and one-year term deposit rate of 3.40 per cent, which would earn Niamh a better €684 net interest. For a shorter-term commitment, this pays.
There can also be administrative faff with some overseas deposits. When searching for the best rates on platforms like Raisin, be mindful of countries where withholding tax is charged.
In Sweden and Italy, non-residents are exempt from withholding tax on interest earned on deposits. That means you must pay tax on the deposit interest in Ireland, but you won’t have to pay another tax to the Swedish or Italian government.
Portuguese banks do charge withholding tax. Ireland has a double taxation agreement with Portugal where you will not pay more than 33 per cent Dirt in total between the two countries.
To get this reduction in withholding tax in Portugal, you will have to provide a signed 21-RFI – that’s a Portuguese tax form – which Raisin will provide for you. You will also need to provide a tax residence certificate.
There can be other administrative unintended consequences of putting money in an overseas bank too, says Benson. “In the event of death, it can be messy in some places,” he says. “Depending on the amount in the overseas bank, you may have to take out probate in both Ireland and that country if you die. So you get this interest of €500 and then you spend €2,000 trying to straighten it out.”
When choosing the right deposit account at home or away, question whether your money should be on deposit at all, says Benson.
If the fix is longer than three years, then maybe the money shouldn’t be in a bank account at all but invested. “Beyond three years, there is plenty of data to say you can actually start taking on some risk.”
