What is it costing you to keep your cash on deposit?

How times have changed for savers! It wasn’t so long ago that some deposit providers were offering retail savers interest rates of over 4% p.a.  As well as attractive returns, the capital was protected with an unlimited government guarantee through the Eligible Liabilities Guarantee (ELG) scheme.

But today we see interest rates that have decreased dramatically (now close to zero) and the ELG scheme now closed, meaning no protection for deposits over €100,000. Savers today are also now facing an increased DIRT rate.

And maybe the final straw emerged at the start of May as the OECD in its biennial economic outlook, called on the ECB to loosen policy even further “to move inflation more decisively towards target” and to be prepared to adopt unconventional measures such as negative interest rates or quantitative easing to prevent a drift into deflation. What does this mean to you and me? Well now you would pay the bank for letting them keep your money!

So now just might be the time to re-examine the approach you’re taking with your hard-earned nest egg and maybe take a look at alternative investments for your long-term savings.

 

Why shouldn’t you just hold cash?

Well apart from the reason outlined above, where soon you might be actually paying for the privilege, people often think that holding cash is less risky than investing. However this isn’t necessarily so. It’s worth considering some of the reasons why it might be preferable to move some or all of your cash into investment funds. While this approach may not be for everyone, there are many savers who are not happy seeing themselves getting gradually poorer.

Inflation risk: This is often overlooked especially when interest rates are low.  Any price inflation will erode the purchasing power of your savings as costs rise.

Lost opportunities: Sitting on cash can mean missing potential growth in market upswings. If out-of-favour investments can be bought at a low price, then you may get a higher return over time.

No return on investment: For savings to grow, investment returns in equities and bonds can help build assets in a way that cash can’t particularly in a low/no interest rate environment.

Tax advantages: Returns from investment policies through life assurance companies grow tax free, and tax is only payable when the policy is encashed (or after 8 years, whichever is earlier).  This compares with tax paid on the interest on deposits, which is usually applied yearly.

Time horizon: it’s wise to have cash in hand to take advantage of investment opportunities, but a portfolio that is too conservative may not generate enough returns to reach your financial goals – saving for a deposit for a house, building up an education fund for your children etc.

 

How can I get the best return with the least possible risk?

Getting the best return for you may not be about getting the highest return possible.  It’s about how much risk you’re comfortable taking to achieve a particular return on your investment.

Completing a risk questionnaire can be an insightful process and at Lyons, we can help you with this.  In order to achieve higher returns, you must be willing to accept some risk. However you can tailor your investment to suit your attitude to risk.  For example, with Standard Life’s MyFolio Active funds, you can select from five funds.  Each holds a combination of lower risk assets and higher risk assets, which are adjusted to maximise the potential returns for your attitude to risk.

Getting independent advice from us in this really important area can help you focus on your lifetime goals, such as saving for retirement or building a college fund for your children.  With good independent professional advice, you can be confident that you have a flexible and efficient plan in place for your long-term financial future. And a chance of watching your money grow and achieving your financial goals.

If you want to get your money working harder for you, we’d love to hear from you and help you invest in a way that meets your appetite for risk.

Warning: If you invest in these funds you may lose some or all of the money you invest.

 

Warning: The value of your investment may go down as well as up.

 

Warning: This investment may be affected by changes in currency exchange rates.

26th August, 2014

Posted In: Financial, Insights