Irish save well but not always wisely, as inflation and low rates bite!

We have for a long time been acknowledged as a nation of savers, with figures from the Central Bank showing that funds on deposit are now in excess of €90bn.

Our propensity to save has been further evidenced by recent research conducted by RedC with a representative sample of 2,000 adults, on behalf of Aviva.

It found that deposit accounts remain the most popular form of saving, with average annual savings of €6,000.

This is despite the fact that the average inflation rate in Ireland in 2019 was 0.91pc, interest rates are almost zero and, to add insult to injury, whatever miserly return you get will have DIRT deducted at a rate of 35pc.

The research found those surveyed considered a savings account to be the most important financial product to have. It showed while 81pc had some form of savings or investments, 66pc had a savings account.

This prioritisation of building up a nest egg, whether it is for a deposit for your first home, a holiday, to fund your children’s education, to supplement your income in retirement, or simply to provide peace of mind, is highly commendable and, quite frankly, necessary.

However, watching your hard-earned, after-tax income lose value due to inflation and a lack of returns may not be the most sensible approach in the long term. The one certainty is that those monies on deposit have zero opportunity of achieving a return.

When saving, it is important to have a goal and a plan to understand what you are saving for, how long you want to save for, and to understand the range of potential returns that you might achieve and any inherent risks.

Just like life, the returns on your savings are unlikely to come with guarantees. However, savers should look to get some return, particularly on funds that will not be required in the medium to long term. Understanding the savings objective will help place funds in the right type of account, and will hopefully generate returns or growth on the money invested.

A sensible approach would be to consider your savings as follows:

– Short-term saving, typically over a one-to five-year period. This may include saving for holidays, weddings, home improvements or changing car.

– The medium term typically involves saving for five years plus, and could include funds for your children’s education, moving home or more extensive home renovation projects.

– Longer-term saving tends to be for more than 15 years, and may include assisting children when they come to purchase their first home, a holiday home or to supplement your pension.

Regular saving into a deposit account providing ongoing access to your funds is important and is most appropriate for short-term savings, despite the miserly returns. However, today’s savers should expect to receive a return on both their medium and longer-term savings, and there are many investment options to choose from that will cater to a variety of risk appetites.

A popular choice for savers is multi-asset funds, which combine a range of different assets including shares, property and bonds into one investment, managed for savers in line with their appetite for risk. These funds target outperforming deposits, with annual returns over the past five years ranging from circa 3pc for lower-risk investments to 5pc for medium-risk funds and 7pc for higher-risk funds.

If all the fund choices, various risk options, providers and management charges sound like a bit of a minefield, it is worth considering going to an independent financial adviser, who will devise a financial plan t

hat is specific to your circumstances and risk appetite.

While investment returns can go up as well as down, investing money for the medium to longer term should yield growth. Savers who have monies on deposit that they do not envisage needing in the short term are most definitely missing a trick.

Source: Stephen Rice is investments and pensions manager at Aviva Life & Pensions, Irish Independent