Six years ago, banks in many European countries were insolvent and having been granted bail-outs, they set about the task of repairing their balance sheets. They engaged in a massive fund raising campaign to attract deposits. Fixed term 5-year deposit accounts could earn typically between 4% and 5% pa. At their height, 5-year rates reached 5.25% p.a.
Understandably, there was a huge influx of capital into such instruments. Depositors could get a guaranteed return of 20% to 25% on their money and their original capital, up to €100,000 per person, was guaranteed under the Government’s Deposit Guarantee Scheme. It was a ‘no-brainer’ investment.
Those accounts are now maturing and the deposit interest landscape is entirely different. Interest rates in Europe and the USA are at record lows. Short term deposit rates are close to zero and the best 5-year rates are offering just 1% pa. When you factor in Deposit Interest Retention Tax (DIRT) at 40%, a depositor putting money into a 5-year account today can expect to earn 5% gross or 3% net of tax after five years.
Depositors now have some difficult choices to make.
Do they stick with the capital guarantees on deposits; accept a miserable return on their money and hope that inflation does not kick in anytime soon?
If they set up a fixed 5-year account now and interest rates tick up in future years, they will not be allowed take out their money early and will remain locked into current rates until maturity.
Should they leave their money in short term accounts, earning perhaps 4 euro per thousand before tax and hope interest rates will increase soon?
For those who need to earn a higher return on their savings, many other options are available but seeking more return will involve taking some risk.
Such depositors should consult a financial broker who will look at your situation; assess your needs; attitude to risk and set out your best options. Where that involves you taking more risk, the financial broker will explain and quantify the potential outcomes for you.