No such thing as a risk-free investment for savers as interest rates hit zero

The days of interest on savings are coming to an end, so Irish investors may now have to look elsewhere and be willing to take on some degree of risk, writes Nick Charalambous.

The writing was on the wall for savers for some time.       

Bank of Ireland wrote to pension fund investors and trustees in the summer saying it was charging a negative interest rate for it holding their cash.

AIB has cut interest rates to zero for many personal savers, and Ulster Bank has announced charges for holding very large corporate deposits, as most other banks have already done.     

It was then only a matter of time which bank would start charging personal customers for holding large cash deposits. 

The market was watching who would make the first move, and surprisingly it was German digital bank N26 which announced late last month it would be the first in Ireland to charge negative interest rates for large deposits of €50,000 or more. 

For clarity, the interest charged will be on the balance over €50,000 and not on the full saving balance. 

Irish consumers have, to date, largely escaped being charged interest on their savings, despite the ECB negative interest rates.

The justification N26 gave is that it costs a negative rate of 0.5% for it to hold money with the ECB. 

It is essentially passing on this cost, it said. 

AIB has announced tentative plans to charge individuals holding very large deposits a negative interest next year, while EBS — which is part of the AIB Group — along with a number of credit unions has a cap on the savings it will accept from any individual.

Central Bank figures suggest household deposits have soared for households who kept have their jobs during the pandemic. 

However, there are still paths to be taken for people who have built up a sum of money and set aside, possibly funds that would normally have been spent on a foreign holiday and nights out.

But households face a risk to their savings in making some of these investment choices.     

The life assurance companies — including Aviva, Zurich, and New Ireland to name but a few — brought out options that would give savers at least some hope from their deposits.

These accounts offer, I think, a fairly generous amount of up to €250,000 with easy access to the money without penalty. 

They also offer what may be low-risk funds as well as the option of blending some of the savings into higher-risk funds, should the investor choose. 

These higher-risk funds include technology funds, such as a Nasdaq tracker, and funds offered by a number of brokers or banks.

Although I am not recommending any fund, the benefit of these accounts, in my opinion, is the diversification and flexibility they may provide.

However, it is very important to stress that they involve risk to your savings or deposits, in this time of huge uncertainty for the world’s Covid-19-hit economy.  

They are investments and not deposit accounts that involve risk, and we have all seen what has happened to supposedly low-risk investments during the last financial crisis 10 years ago.

Risk and reward go hand-in-hand for investors, so it is important for individuals to assess where they are on a scale of one to seven in accepting risk, which could involve losing a large chunk of your money.

At the bottom end of the scale, one is representative of deposit accounts with no risk and little reward in these times of zero interest rates. 

Seven on the scale represents the extremely high-risk investments, such as Asian equities that have the ability to grow or slump by huge amounts. 

Advisers normally suggest that investing money in the short term is not for building up nest eggs for your children when they are very young. That’s a long-term investment.

And there is never a one-size-fits-all solution.

I would also warn that there is a wide range of fees that banks and brokers will charge you for managing your money, and in some cases they can charge exorbitant fees that can eat into any supposed gains.       

At the bottom end of the scale, one is representative of deposit accounts with no risk and little reward in these times of zero interest rates. 

Seven on the scale represents the extremely high-risk investments, such as Asian equities that have the ability to grow or slump by huge amounts. 

Advisers normally suggest that investing money in the short term is not for building up nest eggs for your children when they are very young. That’s a long-term investment.

And there is never a one-size-fits-all solution.

I would also warn that there is a wide range of fees that banks and brokers will charge you for managing your money, and in some cases they can charge exorbitant fees that can eat into any supposed gains.       

The charges vary between no entry costs, but can climb to be as elevated as 5%, even before they charge you additional management costs that can range from 1% to 2% per annum. 

The charges vary between no entry costs, but can climb to be as elevated as 5%, even before they charge you additional management costs that can range from 1% to 2% per annum. 

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