When considering ways to grow and preserve wealth outside of traditional deposit accounts such as savings or current accounts, there are several innovative and effective structures.
These options often offer higher returns, tax advantages, or tailored features that align with different financial goals.
Below is a comprehensive overview of some of the best saving structures outside of deposit accounts, covering their features, benefits, and considerations. John Lowe of MoneyDoctors.ie sets out the options.
1. Retirement accounts / pensions
Retirement savings accounts or pensions are designed to help individuals accumulate wealth for their retirement years with tax advantages. There are two ways to start a pension:
a. Auto-enrolment:
- Employer-sponsored government-initiated plans that allow employees to contribute a portion of their salary pre-tax.
- Starting next January, employee and employers starts with 1.5% each, with the government chipping in 0.5%. This rises to 6% from the employee, 6% from the employer and 2% from the government. Details are still to come – the process is now in its 25th year of negotiations.
b. Individual Personal Retirement Savings Accounts (PRSAs) or Additional Voluntary Contributions (ACVs):
- Traditional contributions are tax-deductible depending on age; for instance, at age 30, you can invest up to 20% of your net annual earnings/ These earnings grow tax-free in your fund.
- Suitable for individuals who want flexibility and tax advantages to supplement employer-sponsored plans.
2. Education savings accounts
a. College savings plans: regular stock market saver accounts.
- All insurance companies offer them.
- Minimum generally €100 per month (maximum €2,500). Irish Life plc minimum is €250 per month.
- Withdrawal penalties for the first 5 years on a reducing basis (5% 1st year and 1% 5th year – no penalties after 5 years).
- With an average annual 10.72% growth in the stock market from 1991 to 2020, this has the best return to start your third-level fund.
3. Brokerage and investment accounts
Individual investment accounts:
- Offer flexibility to invest in stocks, bonds, ETFs, mutual funds, and other securities.
- No contribution limits or restrictions; suitable for goal-specific savings outside retirement.
- Liquid, so can be cashed in at any time. Capital gains, dividends, and interest are taxable, but the account provides control over investment choices.
4. Real estate investment
- Purchasing property can serve as a long-term savings structure, providing both appreciation and rental income.
- Real estate can diversify an investment portfolio and hedge against inflation.
- Requires significant capital, management, and understanding of the market.
- Provided you invest well, the only downside is you need capital to start, plus rent guarantees, which will not suit the majority of savers at the moment.
5. Precious metals and commodities
- Investing in gold, silver, or other commodities can act as a hedge against economic instability and inflation.
- Typically held through physical assets or via ETFs and futures contracts.
- Considered a store of value rather than a cash flow generator. Gold does not have an income!
6. Annuities
- Insurance products that provide a stream of income, often used for retirement.
- Fixed annuities offer guaranteed payments; variable annuities fluctuate with market performance.
- Can be a way to secure a guaranteed income, but often comes with high fees and complex terms.
7. Peer-to-peer lending
- Investing in loans to individuals or small businesses via online platforms.
- Offers higher interest rates compared to traditional savings, but with higher risk.
- Diversification and proper research are essential.
8. Cryptocurrencies and digital assets
- Digital assets like Bitcoin, Ethereum, and other cryptocurrencies have gained popularity as alternative investments. Caveat emptor - only invest what you can afford to lose.
- Potential for high returns, but highly volatile and speculative.
- Appropriate for risk-tolerant investors with a long-term horizon.
9. Venture capital and private equity
- Investing in startups or private companies through venture capital funds or private equity.
- High-risk, high-reward structures that require substantial capital and patience.
- Suitable for accredited investors seeking diversification outside traditional markets.
Considerations when choosing saving structures
- Risk tolerance: higher returns often come with higher risks. Diversification helps manage risk.
- Liquidity needs: some options, like real estate or private equity, are less liquid.
- Time horizon: longer horizons allow for riskier investments that can grow over time.
- Tax implications: understand the tax treatments to optimise after-tax returns.
- Costs and fees: be aware of management fees, fund expenses, and other costs associated with investment products.
Outside of traditional deposit accounts, a myriad of saving structures exist, each tailored to different financial goals, risk appetites, and investment horizons. Retirement accounts provide tax advantages for long-term retirement planning.
Education savings plans are great for third level college fees. Investment accounts, including brokerage accounts, real estate, commodities, and alternative investments like cryptocurrencies, offer opportunities for diversification and higher returns but come with varying degrees of risk and liquidity. Peer-to-peer lending and private equity cater to more sophisticated investors.
The key to successful wealth accumulation outside deposit accounts is diversification, understanding risk, and aligning investment choices with personal financial goals and timelines. Consulting with a financial adviser can help craft a tailored strategy that optimises these various structures to achieve long-term financial security.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.
For more information, click on John Lowe's profile above or on his website.
