I have €300k in cash and want to put the money to work in the short term until I have a longer term plan. Clearly there is little interest to be had from the Irish banks. I have heard about money markets and government bonds but don’t know access them. What low-risk options are out there?
– KB, Dublin
Prolonged inflation over the last couple of years has shown us the costs of leaving money in the bank, where its purchasing power steadily diminishes.
But there are options out there for a low-risk return on your cash.
We’ll look at four of them.
Bank deposit interest is changing
First, there are bank deposits. The “risk-free” rate of return is currently 4%, although no Irish bank passes that on to customers. Others do. German online bank N26 offers 4% interest to customers subscribing to its “metal” account for example. That costs €16.90 per month, reducing your annualised return on €300,000 to 3.9%. Raisin Bank has also been popular with Irish savers, enabling access to reasonable rates from banks across Europe.
Overseas deposits have become easier to access, but there is a certain amount of admin. You’ll have to account for DIRT and potentially PRSI yourself.
And a key risk many people miss when banking overseas is what will happen in the event of death. Your successors may need to take out probate abroad to access the money, incurring substantial legal costs.
Should you fix a low-risk deposit rate?
While the base rate of interest is 4%, that will likely change next month, as the European Central Bank begins to cut Eurozone rates. That might prompt you to look at fixed term deposits in order to lock in a return. These are available from various banks, life assurance companies, and some other specialist providers.
Right now, for example, Standard Life is offering a five-year deposit returning 3.2% annually, backed by Barclays Bank Ireland. In the context of falling interest rates, that will be attractive to some savers, and has the benefit of all the tax and other admin being done directly by the provider.
Money markets are a highly liquid alternative
Thirdly, you mention money markets. A money market fund invests into short-term loans to governments, banks, and some large businesses. Typically all the loans fund are repayable within a year, and often within days.
Money market funds offer fast access to your money, a low degree of risk to your capital, and an element of return in line with prevailing interest rates. They’re popular with savers who value the ability to switch in and out of the fund while building a wider investment portfolio.
Government bonds have tax benefits for large investors
Fourthly, there are government bonds. If held to maturity, it’s possible to gain a guaranteed return here. And if you choose an Irish government bond, much of the growth can be tax-free to an Irish taxpayer.
Irish bonds scheduled for redemption in 2026 and 2027 are returning around 2.7% right now. You’ll need to be prepared to invest €200,000 or more and hold it to maturity, as liquidity can be more difficult for these instruments.
Before you start: are you really a low-risk investor?
Lastly, a word before you leap in: consider what’s holding you back from investing the cash longer-term.
There’s nothing wrong with seeking a risk-free return on cash. If you’re likely to need to lay your hand on the money over the next three years, it’s the right approach, as your money has little time to recover from short-term setbacks. But if you can tolerate some short-term ups and downs, you’ll enjoy the prospect of higher returns – at least for a chunk of your money.
This article is adapted from a Moneycube column which appeared in the Sunday Times on 12 May 2024.
