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Why not to leave your money on deposit

If you are a business owner and are fortunate enough to have some surplus cash on your balance sheet you might want to reconsider whether it’s worthwhile leaving it on Deposit.

According to the latest figures from the Central Bank, over €92 billion is held on deposit in Irish Banks at the moment, approximately €40 billion of this is Business Deposits. 25% of all Irish wealth is held on deposit, that’s three times more than in frugal Canada and twice as much as our neighbours in the UK. All this at a time when Deposit rates are at their lowest levels in a generation. According to comparison website www.irishdeposits.ie the best available deposit rates for companies at the moment are 1.1% (12 month fixed with PTSB) OR 1.0% (12 month fixed with KBC).

depositAs if this isn’t bad enough, then there’s the tax. Some Individuals with funds on Deposit may have to give 45% of the interest they make back to the Government in the form of Dirt (41%) and PRSI charges (4%). The 4% charge is applied to people earning more than €3,174 in interest. For a business deposit, the rate of DIRT which applies is 25%, however if the business is a “close company” (this means the business is controlled by 5 or fewer people), then you are required to pay an additional 20% surcharge on any deposit Income which is not distributed. Many business owners reading this may not even be aware that they are paying this surcharge, your accountant just sorts it for you and you pay it.
Now, I’m not suggesting that you shouldn’t have some money on deposit at all time. Of course it’s prudent to set money aside for a rainy day, emergency fund or working capital but keeping too much money on deposit in a low interest rate environment is not productive. Furthermore, thanks to the ECB’s QE policy which means more cheap money for Irish Banks, deposit rates are likely to remain low for some time to come.

One investment option available to business who want to avoid the close company surcharge is to invest in a Managed Fund through a life company. Investing in such a fund can make a lot of sense as long as the funds aren’t needed for short term working capital. Generally, a minimum term of 5 years was advised in order to make such a strategy cost effective as many funds had 5 year exit penalties attached. However many fund providers will now offer investors a contract which has no early exit penalties, this should be particularly appealing to Business owners as they would not suffer a financial penalty if they wished to get access to all or part of their investment after a short period of time. One cost to be aware of with this type of Investment is the 1% government life levy which applies to all investment, some of this cost might be covered by the fund provider depending on the individual contract.
By investing in a managed fund the investment returns are exempt from the Close Company Surcharge of 20%. This strategy also shelters the investment returns from tax for up to 8 years – your company would also only be liable to a reduced Exit Tax rate of 25% versus the 41% that a private individual pays.

Investors are looking for other options to boost their return and protect against inflation – while not assuming too much risk. One such option which many clients are using is “Exchange Traded Receivables” ETR’S from Debtors exchange. ETR’s allow investors to capitalise on companies’ need for low-cost credit, and ties in with the rise of non-bank lending. If banks were offering attractive rates people wouldn’t move but as deposit rates have fallen further and further, more people have become willing to look at alternatives such as ETRs. This type of product is open to Individuals and businesses and is attractive for a number of reasons. It currently pays a very strong fixed return of 3.50% pa, there are no management fees, Investors can get access to their money on 60 day notice if necessary, it’s also very tax efficient as it is liable Capital Gains Tax of 33% for Personal clients rather than DIRT of 41%.

If you would like to know more about the various Deposit alternatives available for Companies and Individuals you can contact Declan Maher Financial Services Ltd on 087 1444977 or at info@declanmaherfs.ie


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