With the departure of Rabo Direct from the Irish deposit market this month, Martin Glennon, head of ifac Financial Solutions, discusses the best options for your money Rabo Direct, the self-professed “straight talking” bank is packing its bags and “straight walking” out of Ireland.
The departure date looms as it is due to shut its online doors on 16 May 2018 and all existing account holders are being urged to close their accounts and transfer funds to another provider.
If you don’t act before the deadline, your account will be frozen and your money retained by Rabobank. This means that you will receive no interest and no online access to your funds. Access to your money after the deadline will involve extra requirements, such as the provision of identification documents. So if you have an account I would strongly recommend that you act quickly
What options do I have?
When you see the level of interest that is on offer from the remaining deposit providers, it is understandable that many Rabo customers are asking what they should do.
My years of experience have taught me that all clients are looking for the “unicorn account”. By explanation, a unicorn account is one that offers you (a) full access to your money (b) 100% security and (c) delivers a guaranteed growth rate of 6% per annum. Have you seen any lately?
Of course not, just like the unicorn, they don’t exist. The reason for this is that there is always a conflict or trade-off between the key goals that people want for their money: access, security and growth.
Because one account cannot give us all three goals, it makes sense to divide your money and look to achieve these goals in different accounts. I like to think of this as allocating your money into different pots and then giving each pot a specific job.
Job one – Unexpected Events (Demand & Notice Accounts)
The first thing to do is to make sure that you have access to money for an unplanned or unexpected events. The “rainy day” account or “emergency fund”. How much you hold depends on your personal preference. What would give you peace of mind? As a guideline, I would recommend a minimum figure of three months’ income.
With access so high, don’t expect much growth on this money. The current rates available range from 0.0% to 0.3% AER for demand deposit accounts. KBC is offering the best rate on this account at the moment.
Job two – Expected Events (Fixed-Term Accounts)
Next you sort out your short-term access for the planned events. Examples of this include changing the car, home improvements, a wedding or college fees. These are the expenditures that you know are coming over the next two to three years.
Typically, fixed-term accounts would be used to ensure that the funds are available when needed and that you achieve some (but not a lot of) growth on your money.
The rates available on a 12-month, fixed-term deposit account range from 0.05% to 0.6% AER (Ulster Bank). For 36-month accounts the rates vary between 0.3% and 0.7% AER (Permanent TSB)
Job three – Growth
Only when you’ve set aside funds for the expected and unexpected, should you consider looking for real growth. This, therefore, should be the money that you don’t plan to spend in the short to medium term. Or as one client put it, “this is the money that I don’t want to spend”.
When it comes to long-term investments, the choice available is vast. Investors have access to hundreds of life assurance funds, thousands of international funds through investment platforms such as Davy and Conexim, and tens of thousands of individual shares and bonds available through international stock markets. Add to this options for property, private equity, infrastructure and commodities, and you are left with an overwhelming choice. To help cut through the forest of options, I suggest these two steps:
Step one is to get the correct balance between the return you want and the level of risk you are comfortable taking. Understanding your risk profile helps narrow your focus. You want an investment strategy that covers three areas: your need for growth, your capacity for loss and your tolerance for risk.
Step two is to find the best type of account for your money. Have you made capital losses in the past that can be offset against future capital gains tax? If so, then life assurance funds should probably be avoided. Do you have an opportunity to avail of tax reliefs by using a pension account? Do the tax incentives of an EII scheme appeal to you? With such complex choice, it makes sense to seek the advice of an impartial financial broker, who can assist you in finding the best strategies for you.
When Rabobank first came into the Irish deposit market, it offered investors accounts that gave them access, security and with growth levels ahead of the main street banks. Its departure leaves many with that “what do I do now?” feeling.
Asking yourself “what is my money for and when do I expect to need it?”, will give you guidance as to the type of accounts that are best suited to you. Giving your money different jobs that cover the short, medium and long term is a great start. Then it’s just a matter of finding the best accounts to suit your risk strategy. CL
Martin Glennon CFP® QFA, is the head of ifac financial solutions.