A new crop of tracker bonds is increasing savers’ chances of making money, just as the government is forcing Ireland’s most troubled banks and building societies to leave the deposit market.
Trackers, which claim to pay stock market-type returns without the risks, could offer better value now interest rates are expected to rise. The European Central Bank has signalled a rate increase for next month, with two more expected in the second half of this year.
These bonds are popular with savers looking to beat deposit returns. However, many have been badly burnt in the past. These include 432 customers who are taking legal action against ACC Bank over losses from its Solid World bonds. They got their money back, but earned no return on their investment.
This was a disaster for most because they had borrowed from ACC to make the investment, leaving them with no gains to cover the interest bill on the loans.
The attraction of trackers is a money-back guarantee at maturity, even if the stock markets they follow perform badly. Eoin Kennedy of New Ireland Assurance, whose Secure Advantage bond has attracted more than €200m in the past year, said: “Upward movements in medium to long-term interest rates make it cheaper to provide the guarantees, feeding into higher tracker returns.”
Advertisement
Savers investing in the Secure Advantage series 15 by next Friday’s deadline will earn 5.5% on half of their money for one year, with the rest invested in a tracker bond for four years and 11 months. If they had invested 18 months ago, they would have earned high interest on only a quarter of their money, with the rest tied up in a tracker bond for five years and 11 months.
Vincent Digby of Impartial.ie, an adviser, said: “You can usually get better value elsewhere, but tracker bonds are currently worth considering because they have the potential for better returns. The risk remains that you’ll get nothing more than your money back after tying it up for a number of years. After inflation, you’d have suffered a loss.”
We answer your questions.
Can I actually make money?
Advertisement
Ronan Smith, an independent investment consultant, examined 11 tracker bonds in 2009 and concluded there was little chance of earning more than on deposit. He calculated that the chances of only getting your money back with no investment gain at all were greater than one in four.
The odds may have improved since then because rising interest rates mean that trackers offer better value.
Kennedy said: “The chances of any equity-based investment beating deposits were slim in the past few years because of the stock market crash. If you believe we’re heading for another crash, keep your money on deposit.”
What’s available?
Advertisement
Most trackers split your investment, putting part on deposit at a rate of interest far higher than you would earn from a bank or building society. This guarantees a return on at least part of your money.
The rest is locked away in a bond that pays a portion of any growth in a stock market index, although some track currencies or commodities instead. If performance is poor, this portion of your investment may earn nothing.
New Ireland’s Secure Advantage 15 bond is open to those with at least €5,000 to invest. Half of your money will be repaid after a year with a return of 5.5%. The rest will follow on February 23, 2016, with a return of up to 125% of the growth in five stock markets.
Ulster Bank’s Index Combination bond, which has a minimum investment of €3,500 and a deadline of April 7, gives you a choice.
You can put 30% of your money on deposit for one year at 14% interest. The rest will be invested in a tracker bond for six years, earning up to 4.7% a year. If this is too long, Ulster Bank has an alternative. It pays 10% interest on 20% of your money, placing the rest in a tracker bond for four years earning up to 4.2% a year.
Advertisement
Irish Life’s Clear Tracker 8 is available until April 21 with a minimum investment of €10,000. It pays 80% of any growth in the Euro Stoxx 50 index if you invest for three years and six months, or up to 115% if you delay maturity for an extra year.
Other options include Investec’s Emerging Markets Dual Deposit 2 account, KBC Bank’s Lock-In Plus Split Deposit account, and the Split Deposit bond 15 from BCP Asset Management.
How do I decide?
To see which trackers offer the best value, you must divide them into their components.
Trackers put most of your money on deposit, where it earns interest allowing the deposit to grow to the amount needed to repay your capital at maturity.
Advertisement
Of the remainder of your investment, some of it is used to buy an option on the stock market index that is being tracked. The rest disappears in fees and charges.
Tracker bond providers are required to disclose the split between the amount that goes on deposit, the cost of the option and the impact of charges. A recent inspection by the Central Bank, however, found that some providers, which remain unnamed, failed to comply with this.
Irish Life says its Clear Tracker 8 tracker puts 81.5% of your money on deposit. This pays more than 6% interest a year to allow the deposit to grow to 100% of your original investment at maturity after three years and six months.
Digby said: “The less money that goes on deposit, the more interest providers such as Irish Life must pay to be able to match the 100% capital guarantee at maturity. An interest rate of 6% is worth considering because it’s a lot more than you would earn from a bank.”
Banks are willing to pay high rates on trackers to encourage savers to lock up their money for as long as possible, filling the funding gaps caused by the financial crisis.
Kennedy said: “As banks are keen to attract more deposits, especially long-term deposits, the rates they pay trackers have been increasing. This means less money has to go on deposit to meet the guarantee — meaning more money can be spent enhancing products in other ways.”
What about tax?
With some tracker bonds you will lose 1% of your money up front because they are subject to the government’s life assurance levy. Gary Hanrahan of Capital Options, an adviser, said: “If you choose Investec’s Emerging Markets Dual Deposit account, you won’t pay the levy. If you pick New Ireland’s Secure Advantage bond, you will pay the levy because New Ireland is a life assurance company.”
Gains made on tracker bonds are subject to an exit tax of 30%. If you left your savings in a bank account, you would pay deposit interest retention tax at 27%.
Is my money better off in a bank?
The financial crisis has forced Ireland’s cash-strapped banks to reward savers, paying more for deposits than banks in France, Spain, Italy or Germany (see chart).
Hanrahan said: “The question is whether they will pass on the interest rate rise expected next month. Banks believe they are already over-paying for deposits, so they may be tempted to hold back some of rate rise to improve their margins.”
Another concern is the extent to which deposits are protected, especially as there are fewer banks to chose from following the government’s first steps to restructure the industry. This has resulted in Anglo Irish Bank’s deposit business being sold to Allied Irish Banks, while Irish Nationwide’s savings books has been bought by Permanent TSB.
Savings in merged institutions are protected up to €100,000 per customer under the deposit guarantee scheme, down from €100,000 in each institution before the merger. Savings in excess of this limit are covered by the state’s eligible liabilities guarantee (ELG), which is due to run out in June, but may be extended until the end of 2011.
Hanrahan said: “Deposit protection of €100,000 per customer is enshrined in European law, so that Brussels should honour it if Ireland was unable to. The ELG may only be as good as the strength of the Irish sovereign, however, so my advice is to limit your exposure to individual banks to less than €100,000.”
‘I must know more before taking plunge’
George Byrne has saved with EBS since childhood, but is considering investing some of his money in search of higher returns.
Byrne, 29, the owner of GB Barbers in Rathfarnham shopping centre in Dublin, said: “Investing would interest me, but I’d need to learn more about it before taking the plunge.”
For now, most of his savings are in EBS’s Family Savings account, to which he adds €50 a month by direct debit. “I opened the account more than a year ago after the birth of my son, Logan,” he said. “I want to put a bit aside to give him a start in life when he’s older.”
The account pays a market-leading rate of interest of 4% fixed for the first year on savings of €100-€1,000 a month. This drops to 3% fixed in the second year. EBS allows two withdrawals a year and savers can lodge once-off lump sums of up to €50,000 a year.
Byrne is also saving up to buy a house. “I felt under pressure to buy four years ago, when prices were rising so quickly that I feared being priced out of the market for life,” he said.
“I didn’t qualify for a mortgage, though, as I’d just opened the barber shop so my earnings weren’t secure. In retrospect, I had a lucky escape.”
While the business is now established, Byrne is biding his time as house prices fall. “I’m prepared to wait and see, especially as it’s so difficult to get a fixed-rate mortgage,” he said.
The banking crisis is a regular topic of conversation among Byrne’s customers, and he is concerned about the safety of his savings.
“I suppose it’s safer in the building society than under the mattress,” he said. “The government says it’s secure, but I’d be goosed if I woke up one morning to hear it was gone.”