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The Trouble with Cash…
For businesses, the logic of viewing cash as a safe haven asset has been eroded over the last decade. If you are holding cash in a trading account or company account now is the time to reconsider.
In late 2011, the best interest rate available in Ireland was with Northern Rock. They were offering 3.25%, and if you were wary of them, (you would have been right) the next best rate was PTSB offering 2.5%. At the time, this looked low. Deposit interest rates have been in decline ever since. Today, a Business Demand Deposit may yield you 0.01%. In all likelihood, you can expect negative rates going forward. The impact of Covid-19 on economic growth will mean that we will not see any rates rises for the next few years.
In spite of this, Irish businesses and households are still holding record numbers of cash on deposit. This behaviour may be down to loss aversion, taking the plunge and investing this cash may seem risky. If you are concerned about loss, consider this, holding money in cash will lead to certain loss.
If we consider a corporate deposit of €500,000 over 5 years and assume a negative deposit interest rate of -0.5% p.a. your €500K deposit will be worth €487,624 at the end of the period. This is a loss of €12,376.
You do not have to take high risks to avoid this real loss. If you consider investing in a conservatively managed fund, in a Life Assurance Investment, that delivers, even a low level of net growth, such as 1% p.a. you can see a gain over negative interest rates of -0.5%:
|ESMA 3 Rated Fund||Return = 1% Net p.a.|
|Corporate Tax @ 25%||€6,376|
|Difference Vs -0.5% p.a||€31,505|
Life Assurance Investments
The effect of the Gross Roll Up regime is that a company can defer tax on the investment until at least the eighth anniversary of the contract. This allows the company to compound investment earnings without those earnings being reduced by taxes during this period. It should lead to accelerated investment growth. Another advantage is tied to the life company with whom the funds are invested who are responsible for the deduction and payment of exit tax. The net amount is payable to the company, with no further tax liability. Most Life Assurance investment structures offer easy options, so you can access the money as and when you need it.
There are a number of factors a company must consider before making any investment decision; taxation, liquidity, time horizon to name but a few. However, the impact of very low and/or negative interest rates is often overlooked. At the very least, you should consider this in your short and medium term plans for your business.
If you are concerned about the performance of your fund or investment, you should contact your financial advisor.
Milestone Advisory DAC t/a Milestone Advisory is regulated by the Central Bank of Ireland.