In 2022, global Central Banks began to increase interest rates to combat high inflation after an extended period of low or even negative interest rates. Low Central Bank interest rates meant that depositors and bond investors could earn little to no return from capital protected, low-risk investments. In the last 12-18 months, interest rates in Europe have increased substantially. The current European Central Bank deposit rate is 4.00%, which is the rate banks can use for overnight deposits in the Euro system. Unfortunately, this increase has not been passed on to customers of the main Irish deposit providers including AIB, Bank of Ireland, PTSB and State Savings (An Post). With inflation in Ireland standing at 4.6% in December 2023, this is a significant issue for people with savings in bank deposits. This is because the real value or purchasing power of this cash is eroded over time where inflation is higher than the rate of return earned on savings. An inflation rate of 4.6% may not seem like a lot, but over a ten-year period this rate of inflation would reduce the real value of savings that are not earning a return by c. 38%. In other words, €100,000 of savings would lose €38,000 in value in real terms. Thankfully, there are now more attractive low-risk options available from credible alternatives to the traditional Irish banks. In this series, we will outline what these alternatives are in future issues of this newsletter. If you are interested in discussing these options into your personal financial plan, please do let us know. Money Market Funds The first option that we will review is Money Market funds. Money Market Funds are highly regulated, risk managed investment funds which aim to achieve a return in line with the prevailing money market rate. These funds are managed by some of the largest and most financially secure financial institutions in the world, like JP Morgan and Blackrock. The current yield on a money market funds is approximately 3.9%. They aim to preserve capital, provide a high degree of liquidity and invest in a diversified range of deposits and debt securities to provide a return. As these funds are actively managed, the yield changes on a daily basis. Generally, funds can be withdrawn within 2 business days so do not have to be locked away for a term. Key Risks
Taxation For EU domiciled funds, all income and gains on Money Market funds are taxed under exit tax at 41% for individuals. Under this tax regime no tax is payable until you withdraw your money from the money market fund. However, if you do not withdraw your funds within an eight year period, Revenue do tax you on any gains you have earned in that 8 years. Being able to roll up your gains tax free for up to eight years can help deliver higher compounded returns than deposit accounts that are subject to DIRT more frequently. If you would like to discuss the opportunity money market funds present for Irish savers, please email Team@Distinctwealth.ie or call 01 5392601. shane mcinerneyShane is a Director of Distinct Wealth Management with nearly 20 years experience advising Families and Institutions in Ireland on financial planning, investments and pensions. He is a Qualified Financial Adviser and a Chartered Tax Adviser. This information in this article is based on Distinct's understanding of current tax legislation in Ireland and is subject to change without notice. It is intended for information only and not as a substitute for professional advice. Distinct does not provide tax advice. You should consult your tax adviser for the rules that apply in your individual circumstances. The value of your investment may go down as well as up and you may lose some or all of the money you invest. Past performance is not a reliable guide to future performance. Comments are closed.
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