Bank deposit accounts are a useful way to store everyday cash and the savings you need to be able to easily access. Despite the recent prevalence of historically low interest rates cautious investors have been happy to sit in cash deposits in what has been a relatively benign inflationary environment.

But a recent and significant announcement by some of the Banks operating in Ireland has highlighted the challenge of keeping money in these accounts during a low or negative interest rate environment.
The Bank of Ireland is the latest institution to start applying a negative interest rate to the credit balances of specialised accounts. This means self-administered pensions, small and medium-sized business customers with deposits will be affected. The new negative rate of -0.65% will come into effect from 15 September 2020.
The reason given by the Bank of Ireland is that in the European Union it has been common practice to implement and pass on negative rates for a number of years. The European Central Bank (ECB) actually introduced a negative deposit facility interest rate in June 2014. It was part of measured to stimulate lending to businesses by banks. Until recently, many lenders had absorbed the cost, but with a weak economic outlook and bank’s profitability waning things have changed.
Bank of Ireland is not alone in its decision. On 1 July this year, Ulster Bank began charging negative interest rates on savings of more than €1 million held by its business customers, credit unions and other institutional clients. It would not be surprising to see more banks implement negative interest rates on call deposit accounts over the remainder of 2020 and into 2021.
In times such as these, investors and savers can end up actually paying their bank to hold their deposits in a bank when these funds could be invested and potentially growing in value.

What does this mean for you?

Those with self-administered pensions, for example, now face the prospect of negative interest rates on their deposits. This is hardly welcome news at a time when interest rates were already at all-time lows, leaving cash in deposit accounts earning very little.
For many of our clients, we understand that this kind of decision by the Bank of Ireland might leave few options as circumstances dictate that they must hold cash deposits for everyday personal and business purposes.

The first step in sorting out issues such as personal finances and powers of attorney is to discuss them. Initiating these sensitive conversations may not be easy, but any preparations will help to minimise the complications that come with events such as loss of mental capacity.

The good news is that there is still time, before the effect of negative rate comes in, to consider whether some of the money sitting as cash in deposit accounts could be invested to seek a return. This should really only apply to monies that you do not need in the short-term
Moving cash into investments might sound like a bit of a leap, but at Quilter Cheviot Europe we can help clients to make that move as painless as possible.
Being exposed to a range of asset classes through discretionary investment gives you a better chance of growing your wealth – adding value where it can grow, and at a time when, it matters most. At the same time, you can be sure that Quilter Cheviot is actively managing your investments on an ongoing basis to take advantage of market movements and to help spread risk.

Cumulative Returns for Quilter Cheviot Euro Private Client Indices (PCI) for period to Q2 2020

*Asset Risk Consultants (ARC) analysis of the Quilter Cheviot EURO Balanced PCI began in September 2015.
Taking the step to invest with Quilter Cheviot also means you will have peace of mind, knowing we will keep your assets secure. We maintain a high level of service by taking ownership of each individual client and ensuring our investment managers – like me – are in regular contact with you.
While there are costs and charges that apply to investments, we will always be clear and transparent in our communication with you about what these are – and if they are going to change.
Some people will need to hold on to a portion of their cash in the short term, but for medium to long-term goals or to achieve specific financial objectives, this could be an opportunity to put your wealth to work by investing with a trusted partner.

Written by

Stephen Rooney
Investment Director

Share this article