‘W.ie stays with savings products, should not count on interest rates higher than 1 percent for the next ten years. That means another ten years of loss of purchasing power. ‘ Anyone who swears by the savings account will probably not be happy with the perspective that Peter Vanden Houte, the chief economist of ING Belgium, presents.
If you stick with savings products, you risk losing purchasing power for another ten years.
Yet the amount that Belgians park on savings accounts is growing to unprecedented heights. On Wednesday it became known that 1 billion euros was added to Belgian savings accounts in January. The total is 283 billion euros, a new record. That while most savings accounts have been offering the legal minimum interest rate of 0.11 percent for four years.
Subsidy
That interest is too high in comparison with the market interest. ‘The Belgian government interest rate over 2 to 3 years, which is currently trading at -0.5 percent, is the reference interest rate for banks for their savings accounts. And so savings accounts are actually subsidized by legislation ‘, the ING economist explains the unequal battle that the alternatives to the savings account have to wage. As a result, alternatives are becoming increasingly scarce. ‘Those who do not want to take any risks actually have no more alternatives to the savings account, even if you strive for the same flexibility and security,’ says Vanden Houte.
Our margin is small due to the low interest rate, but this is achievable thanks to our low cost structure.
The corona crisis also gives those alternatives to the savings account an extra push. The fear is that global economic growth will be hit hard by the virus. Some central banks adjusted their interest rates in the past week. The Australian central bank cut its base rate to 0.5 percent on Tuesday, a historic low. The US central bank (Fed) on Wednesday implemented a sharp interest rate cut from 50 basis points to 1 to 1.25 percent, the lowest level in more than two years, and opened the door to additional interest rate cuts in two weeks.
The European Central Bank (ECB), meeting Thursday, has less room to ease its monetary policy, as its key interest rate is already below zero. Nevertheless, the interest rate futures market expects the ECB to lower the deposit rate – for banks that park money at the ECB – from -0.5 to -0.6 percent.
Corona
The chance that interest rates will normalize quickly has become even smaller due to the corona virus. ‘Due to the aging of the population, we are moving to structurally lower economic growth, which means that market interest rates will remain low even when normalization’, says Vanden Houte. ‘According to our models, interest rates can rise again in the long term, but the chance that we will go above 1 percent is virtually nil.’
A long-term alternative, he says, is a well-diversified equity portfolio. “A basket of quality stocks can yield a 3 percent dividend yield. But the corona shock that has prevailed on the stock markets in recent weeks did not help the appetite for equities, certainly not among savers with an ultra-defensive profile, ‘says Vanden Houte.
For those who still hold on to safe savings products and want to limit their loss of purchasing power, there are still a few straws, although they are also getting shorter. We list the options.
Savings books
Forty of the 65 regulated savings accounts offer the legal minimum interest rate of 0.11 percent, according to savings guides.be. Nine savings accounts offer a higher return than 0.3 percent, although there are often conditions attached to this. With Monthly Savings Max, MeDirect offers a total interest of 0.7 percent, although that is for a maximum of 500 euros per month. This also applies to Bpost’s Cocoon Savings Account, which offers a total interest of 0.55 percent, with the additional condition that savers are not older than 40.
Pension savings: insurance yields an average of 1.68 percent in 2019
With the savings accounts without conditions, MeDirect with Fidelity Savings offers the highest interest, a total of 0.55 percent. ‘Savings accounts are the main engine for us to attract new customers, many of whom also start investing in the long term. Because of the low
interest, our margin is small but achievable. We have a low cost structure, with a small branch network and less administrative staff, because we strive for optimally automated processes, ‘says Wim Wuyts of MeDirect. The bank does not intend to lower its savings interest rates. “We pursue a healthy interest rate policy: we closely monitor the markets and make adjustments if necessary, but it has not yet been decided to change the interest rate,” says Wuyts.
Other price breakers do. Santander Consumer Bank, which offers 0.60 and 0.40 percent interest respectively with two savings accounts, is lowering its rates from 16 March. The total interest of the Vision + account falls to 0.50 percent, that of the Vision account to 0.25 percent. Santander Consumer Bank is part of Santander Consumer Finance, the consumer division of Spanish banking giant Banco Santander. Rabobank.be lowered the interest on the Rabo Plus account from 0.35 to 0.26 percent at the end of February.
While Santander and MeDirect are covered by the Belgian deposit guarantee of 100,000 euros, Rabobank.be is subject to the
Dutch deposit guarantee of 100,000 euros.
Term account
Anyone who has deposited their savings in a term account for a longer period of time does not risk any consequences in the event of an interest rate cut. The interest that was applicable at the time of registration applies over the entire term of that term account. Banks can of course lower the interest rates for new registrations.
Today, however, the average rates on term deposits with a term of five years barely exceed the interest rate on the savings account. The average net interest is also low at eight years, at only 0.2 percent.
‘There may be a deposit guarantee, but the question is whether it can be fulfilled.’
Izola Bank offers the highest interest rate for a five-year term account, says savings guides.be. A term account yields an annual net interest of 1.12 percent, the Maltese bank’s website reports. “As a bank operating in Malta and with the small size of the market, our pricing takes into account the interest rates that apply in Malta. There are no immediate plans for interest rate cuts in the short term, ‘he says.
MeDirect also offers a net interest rate above 1 percent (1.05%) for a term of five years. ‘There is always a link between return and risk,’ warns Vanden Houte. ‘There may be a deposit guarantee, but the question is whether it can be fulfilled. For example, can the Maltese government, in the extreme case of a banking crisis, honor that guarantee? ‘
Savings insurance
A third safe haven are the branch 21 products or savings insurance policies, which offer a guaranteed interest rate and a profit share. Your proceeds are exempt from withholding tax, on the condition that you opt for a term of at least eight years, or on death cover of 130 percent. If you choose those products, your horizon must therefore be further.
The guaranteed interest on a deposit applies to most insurance policies for the entire term of the contract on that deposit. However, the guaranteed interest can be lowered during your contract, and then that lower interest will apply to your future deposits.
Patronale and Argenta Life take the cake with guaranteed interest rates of 0.85 percent. At Patronale Secure 21 it only applies for 2020. If it is revised next year, your deposits from 2020 will also yield a different guaranteed interest. Patronale also offers Safe 21, offering a guaranteed interest rate of 0.80 percent for eight years after the deposit. Argenta also has a guaranteed interest rate of 0.85 percent until December 31 of the eighth year following the year of the deposit.
Note that these products do not necessarily offer the highest total interest. Profit sharing is generally higher for products that offer a lower guaranteed interest rate. BNP Paribas Fortis offered a net interest rate of 1.80 percent last year with Free Invest Plan. At Patronale, the total return of the Secure 21 product was 1.65 percent net, that of Safe 21 at 1.50 percent. ‘Because the interest in Secure 21 is less long guaranteed, we compensate for this with a higher profit share, as a potentially higher return,’ says Oriona Claeys of Patronale.
The guaranteed returns for some branch 21 products do therefore exceed 0.11 percent, but you must add the term of eight years. You must also take into account an insurance tax of 2 percent for each entry. Add to that the entry costs, which can be as much as 6 percent with some insurers, and your additional reimbursement is not much left. So be sure to include the entry costs in your calculation. Some insurers do not charge an entry fee, including Federal Insurance for Vita Invest Dynamic, which yielded a gross interest rate of 1.85 percent in 2019.
Anyone who uses the branch 21 product in a pension savings tax contract can avoid the 2 percent insurance tax (see box). In long-term savings, that also offers a tax advantage, the insurance tax does apply.