Interest Rates

There is a lot of interest in interest – considering there’s not a lot of it about!

It wasn’t too long ago that fixed term deposits were a viable and indeed attractive option for pension investors.

In 2011 Harvest’s pension clients could transfer a portion of their pension fund into a 5-year deposit account with a pillar bank offering 4.5% Annual Equivalent Rate (AER). For a €100,000 deposit they received an annual income of €4,500 for 5 years.

Today the same bank is offering 0.1% AER for 5-year deposits – that means an annual income of €100 from the same €100,000 deposit, or a 98% drop in our clients’ pension deposit income.

YearAER ( 5 Year Fixed)DepositAnnual Income
20114.5%€100,000€4,500
20200.1%€100,000€100

Paying Your Bank Negative Interest

The 0.1% interest rate above is hardly anything to write home about, but things are likely to soon be worse.

The below is taken from some current deposit account Terms & Conditions under the heading ‘Negative Interest’:

“We will debit any negative interest you have to pay us directly from your Account either at Maturity, annually where the Investment Period is greater than one year or at any other agreed time.”

Irish banks have been charging large corporate and institutional customers for holding deposits for some time now.

It now looks increasingly likely that this will shortly filter down to regular retail savers across all banks.

If the potentially vague concept of inflation eroding the real value of cash doesn’t push pension investors into seeking alternative investment opportunities, the stark reality of paying the bank each year to hold their deposits might be a genuine trigger for action.

Pension Investors should realise that when they have taken their pension benefits, they will be retired for a long time. Relying on deposit accounts is now an inherently risky long-term proposition.

Einstein called time the fourth dimension. Time (or duration in investment parlance) is the key consideration for investment decisions.

Long term investors – such as pension clients – have the time to be invested in real assets which historically deliver positive returns, partially through dividends or other income distributions. Unless they need access to the capital, in which case they are not true long-term investors, they can afford to ride out the ups and downs of the stock-market.

Like our pension clients, long term savers looking for income now need to think beyond cash or Government bonds and consider real assets such as equities and property.

Many of the funds offering access to these asset classes are well diversified and involve downside risk management strategies within the funds themselves.

While some allocation to cash within your portfolio is wise, it should be part of an overall plan and not because you are ‘running for the hills’.

To discuss the interest rates impact on your pension fund contact us on 01 2375500 or email justask@harvestfinancial.ie to discuss some low risk investment options

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Transferring Company assets into personal wealth

This marketing information has been provided for discussion purposes only. It is not advice, it is provided for general information purposes only and does not fully take into account your financial position, investment needs and objectives, attitude to risk, liquidity needs, capital security needs, capacity for loss etc. It should therefore not be relied upon to make investment decisions. Prior to any formal investments taking place you will be provided with a detailed suitability letter taking into account all the above and outlining why the investment(s) are (not) suitable for you.