Following the banking crisis and property collapse in 2008, many pension plan holders switched their pension funds into cash deposits. At that time, Irish banks were offering deposit rates of over 5% per annum for a fixed period of 5 years. This was very suitable for many pension policyholders. They got a very high rate of return from what appeared to be a guaranteed source. They were not exposed to the type of volatility normally associated with investments targeting that level of growth.
Since then, there has been significant falls in the ECB interest rate. The current rate is 0.05% and expected to remain low for the foreseeable future. As a result of this decline, the interest rate currently paid on Pension Cash Deposit Accounts has also reduced. Current rates are as low as 0.25% AER and the interest rate will vary depending on future economic conditions. Product charges apply, including a management charge of 1% per annum or more, so it is obvious that the pension fund is producing negative returns.
A Cash Deposit Account is normally set up just to facilitate transfers to and from self-directed options, as well as facilitating relevant charges and in some cases withdrawals. Pensions appear to be holding more in the Deposit Cash Account than they need to.
Remember that cash deposits are not as safe as people think. In the event of a deposit provider being unable to meet any claims against it, money from your policy held with that provider will not be covered by schemes such as the Deposit Guarantee Scheme. Fixed term deposits should only be taken out if you will not require access to your money for the entire term because early withdrawal from fixed term deposits is at the discretion of the deposit provider who may impose early withdrawal charges.
Now might be a good time to talk to your financial adviser about the risk of keeping long-term investments in low interest rate deposit accounts compared to investing for the longer term to beat inflation.