Cash deposits in banks or building societies provide a safe means of holding money and generating a small return.
The main issues to consider in relation to cash deposits are:
In general, the higher the interest rate you obtain on your deposits the better. Most people, however, do not change their deposit accounts on a regular basis. Many prefer to leave their money on deposit with the same bank that provides their current account.
This can be a mistake, as most banks tend to entice customers with initially high interest rates which are then allowed to slip downwards. This can make a big difference over time, as the following examples show:
Sue places €10,000 in a deposit facility paying 3% interest after tax. After one year the bank lowers the interest rate to 1% after tax and leaves the rate there. After ten years, Sue’s money is worth €11,265.
James places €10,000 in the same deposit facility, but whenever the bank lowers the rate he finds a new deposit provider who will pay a 3% after tax interest rate. After ten years, his money is worth €13,439.
Seemingly small differences in the interest rate you are getting can make a big difference over time. For this reason, it pays to shop around for a good rate regularly.
It can often be possible to get a higher interest rate by fixing the rate for a period of 1-5 years and leaving your money untouched. One should be aware however, that this may only be a good deal if interest rates do not rise in that time period. Additionally, access to your money may either be restricted or may carry interest penalties if you choose to withdraw it within the fixed rate period.
Another option that allows access to your funds is a notice account, for example a 30-day or a 3-month notice account. These tend to offer a higher rate than instant access deposit accounts, but access to your money is possible – with an interest penalty if you do not give the required amount of notice. Notice account rates are variable, however, and need to be watched in the same manner as those rates on demand deposits.
Most countries offer deposit protection schemes. Note however that where the bank you use is a branch (as opposed to a subsidiary) of a foreign bank, the deposit protection scheme, if one exists, will be that of the bank’s home country, not Ireland. An EU Directive requires all EU members states to provide deposit protection of a minimum of €100,000 per depositor, per bank - this amount may vary for branches of banks based out of non-Eurozone countries such as the UK or Denmark.
Deposits in Ireland are subject to Deposit Interest Retention Tax (DIRT) of 41%. Any interest received has DIRT deducted at source. This can make it difficult for deposit returns to keep pace with inflation.
If you wish to earn interest without payment of DIRT it may be worth considering Irish State Savings Certificates or Savings Bonds.
If you or your spouse is aged 65 or over and if your income is below the income exemption limits (€18,000 per annum for a single person, €36,000 per annum for a married couple) you should be able to claim exemption from DIRT by completing a form at your bank or building society.
The greatest danger for deposits is inflation. An interest rate of 3% may look reasonable on paper, but if inflation is running at 4% per annum then your money is steadily losing value – and DIRT may be worsening this effect.
Over the long run, cash returns over most periods have tended barely to keep pace with inflation even before tax is considered. This makes economic sense because when interest rates are high, inflation also tends to be high.
If your priority is to ensure that your money retains its real value over a long period, it is questionable whether all of it should be placed in cash deposits due to the threat of inflation. For this reason it may be worth considering investing a portion of it in a manner that reflects the level of risk you wish to take.