The European Central Bank may have signalled no move on interest rates at its most recent meeting, but this doesn’t mean that Irish savers are safe from further cuts in the rates they earn on their deposits.

Deposit rates have been on a downward trend for some time now, and earlier this month banks slashed rates even further.

And there doesn’t seem to be a respite in sight. Writing in this newspaper recently, Martin Wolf noted that interest rates are so low because economies such as Europe are in a “managed depression”. And he doesn’t expect it to end soon, arguing that “it is likely that historically low rates will be with us for quite a while.”

Indeed the new environment punishes savers and rewards borrowers – but not everyone wants to be a borrower.

Against such a background then, what should savers do? Hang tough and earn 1 per cent on their savings or switch to a potentially higher yielding, but riskier, investment product?

“There is potentially a problem for those types of clients, who have never considered anything other than deposits,” concedes Donnacha Fox, executive director with Quilter Cheviot, noting that rates have “shrunk to near nothing and are taxed to the hilt”. So what are the options?

The latest rate cuts

Permanent TSB slashed rates on a host of its products on March 10th and 11th. Its regular online saver account for example, now pays out just 1.75 per cent compared with 2.10 per cent previously, while if you’re a fan of its saving product for children, the Safari Saver account, the rate on this has been cut by 25 basis points to 1.25 per cent.

And the bank is not alone. KBC Bank also lowered the rate on its Standard Fixed Rate Account and top up deposit account in mid-March, while back in February, both Rabodirect and Nationwide UK Ireland lowered the rates on a number of their saving products.

This means that if you have a lump-sum of €10,000, the best rate you can now get is just 1.55 per cent from both KBC Bank and Nationwide.

While rates on regular savings have held up more firmly – you can get 4 per cent for example on savings of up to €12,000 a year with Nationwide – after a year the balance is typically transferred into an account paying about 1 per cent, which won’t help with the long-term problem of helping your savings to grow.

And of course high tax rates make deposits even less attractive. If, for example, your €10,000 deposit produces a return of €155 after a year, you will have to give at least €64 of this to the Government in Dirt tax, if not €70 if you have to pay PRSI as well.

The outlook

And it doesn’t look as if rates will stop falling. “Rates are going to get much lower here,” warns Vincent Digby of Impartial, noting that in an increasingly competitive mortgage market, banks have limited room to manoeuvre with increasing their net-interest margins on lending, so the result is lower deposit rates. He says that going forward, deposit rates of 0.5 per cent may be the norm.

But with inflation staying low, that in itself may not be problematic.

Consider the example of a recent auction of 10-year German government bonds. Demand hit a 12-year high as investors ploughed in to buy bonds at a yield of just 0.25 per cent.

And there is a follow-on from such behaviour for smaller savers, Fox notes.

“If large institutions are happy to park their money in those instruments . . . you have to respect that,” he says.

Jonathan Sheahan of Compass Private Wealth agrees that low rates are not necessarily a signal to flee deposits.

“Even though rates are being cut fairly aggressively at the moment, they are still above where they should be all things being equal,” he says, noting that given that key ECB base rates are just 0.05 per cent, “any return above 1 per cent is generous anyway”.

“People have to realise that we are now in a low-interest-rate environment, a low growth environment and a low return environment.”

What to do?

Given the interest-rate environment, if you have a lot of money on deposit, you might be thinking that it’s time for a change.

“It’s unsatisfactory for assets to be doing absolutely nothing; it doesn’t sit well with people,” says Digby.

However, this doesn’t necessarily mean that you should spring into action either.

“You should never have a knee-jerk reaction to deposit rates. It’s very dangerous for people to say ‘now I want to invest all my money.’ People should look at their overall asset allocation,” he says, adding that even if you have 40 per cent of your money in cash “chances are it’s in cash for a particular reason”.

So don’t throw caution to the wind just because rates have fallen.

“The only way to seek a higher return is if your risk profile has changed,” adds Sheehan.

Indeed acting in line with your own risk appetite is of paramount importance.

This means that if you’ve been typically happy to keep your money on deposit, your primary concern is protecting your capital and accepting some modest returns provided that there is little risk to your capital, Digby warns then that it would be a mistake to behave as an investor if you are emotionally more concerned with capital loss.

“Jumping from deposits into full on equities – it’s way too far to go and has too many potential risks.”

Other options?

Bearing in mind that “anything will be a bit riskier than cash,” as Sheehan warns, there are nonetheless some other options out there, and there are ways of mitigating against risk.

If you’re looking to move some of your portfolio into equities, “averaging-in”, or allocating your money over a certain time period can help smooth your entry into the market.

Digby suggests adopting a cautious conservative strategy at the outset and only gradually increasing the level of investment risk when a reasonable profit buffer has been built up. “This can and does take time but once someone is up 15 per cent this provides a nice buffer or protection just in case markets fall.”

However, new entrants to the stock market should also beware that many markets are at record peaks.

“The issue that people on deposit now face, is that markets have hit all time highs, although we’re still of the view that equities are a growth asset class,” says Fox, adding that if there is a correction in stock markets, “there will be a wall of money on deposit looking to get access to that asset class,” he says. As such, if this was to happen, people with spare money on deposit should use that as opportunity to activate a strategy, he advises.

Keeping the benefits of liquidity that deposits offer is also important.

“You’re looking for transparency and liquidity; you’re not looking to tie up your money for five years,” says Fox.

For Sheehan, this can reduce the attractiveness of capital protected or guaranteed bonds, where you might have to lock away your money for a term of five years of so.

“The biggest problem with those is liquidity risk.” Given the low-interest-rate environment, such products have become popular again, as a way of offering savers a guarantee on their funds, with the added bonus of potentially better growth than deposits.

However, as a general principle, many financial advisers urge savers to tread carefully when it comes to such products.

Digby argues that in addition to liquidity risk, low bond yields have largely undermined the value of these products; the capital protection element is only as strong as the institution underwriting it; and they often come with high levels of fees.

“I fail to understand why anyone would be comfortable to lock up their money for five years, suffer encashment penalties if they need to access it, and get an expected mediocre return,” adds Fox.

Another option to consider is an absolute-return type fund, which is a lower volatility option to a stock-market fund. Typically such funds, such as the Standard Life Global Absolute Return Strategies (GARS) fund and the Zurich Global Targeted Return Fund, will target a cash plus 5 per cent return, but remember, this is not guaranteed.

“We recommend that the investment is set up with full liquidity so the funds can be accessed at short notice with no charges,” Digby says.

Corporate-bond funds may be an attractive option says Fox, noting that they avoid single issuance bonds.

“It’s just a slightly different way of providing an exposure to bonds in general.”