Keeping money on deposit has become much less rewarding in recent years

By Business Editor David Murphy

Funny what a difference a dozen years can make.

In 2001, former Finance Minister Charlie McCreevy introduced SSIA savings accounts in which the Government contributed €1 for every €4 from depositors. In those days the State wanted people to save more – but now as there is less disposable income it wants them to save less.

Keeping money on deposit has become much less rewarding as interest rates have been steadily lowered by the banks.

Unless an individual is prepared to put money away for ten years, a lump sum of €10,000 won’t get a return higher than 2.5% per annum.

The Government is jacking up the tax on interest from savings to 45% from next January. As a result many people will consider tax free savings in post offices.

The interest rates offered by at An Post are controlled by the National Treasury Management Agency – which is likely to cut the rates if it sees an avalanche of savers moving money from banks to post offices. It has cut the rates twice in the past year much to the relief of the banks.

Financial institutions use deposits to lend to consumers and businesses. For example if a bank pays a saver 2% and lends at 5%, the difference between the two figures is the bank’s profit.

Reducing the amount paid to depositors has been part of the banks’ strategy to return to profit.

The Department of Finance is also happy to see returns to depositors eroded.

It would appear that the officials in Merrion Street believe engineering an environment of low interest rates and high taxes will prompt consumers to release some of their savings – and if they spend more it will add to economic growth.

This might be too optimistic. Many of those lucky enough to have money on deposit have been financially rocked over recent years by the steady stream of new taxes. The jargon is “broadening the tax base” – in reality it means charging for new things such as water.

From January, the property tax will double, while consumers will pay for water from 2015.

Many savers are sitting on money so they don’t get flattened  by a bill they cannot pay.

Banks will continue to offer low interest rates and savers will have no choice but to accept them. But even if people don’t spend their savings the Government will continue to win. That’s what happens when tax on interest jumps to 45%.