Should you go for a term deposit to grow your savings?
When it comes to savings, the French prioritize security. This is evidenced by the surge in the balance of regulated savings accounts since the beginning of the year. According to data from the Caisse des Dépôts, deposits into the Livret A and the Livret de développement durable et solidaire reached 730 million euros in September.
Some critics might argue that this is four times less than the previous month, or even than in September 2002. In fact, you have to go back to October 2022 to find such a low figure. However, Philippe Crével, the head of the Cercle des épargnants, prefers to note that “with the Livret A rate remaining unchanged as of August 1, the investment is returning to its usual seasonal pattern.”
The second half of the year is indeed less conducive to regulated savings, as households must cover the costs of back-to-school expenses, property taxes, and Christmas spending. These expenses are further exacerbated by inflation this year.
Cyrille Chartier-Kastler, founder of the firm Facts & Figures, notes: "The French who were able to contribute to their Livret A savings accounts have done so; those with cash on hand are now looking for other investment opportunities."
In fact, the Livret A now faces fierce competition. First, the Livret d'épargne populaire (LEP) surpassed the 10-million-account-holder mark in August, driven by an attractive 6% interest rate, according to the Banque de France. The Banque de France’s goal is to reach 12.5 million account holders by the summer of 2024 among the 18.6 million eligible individuals identified by the Directorate General of Public Finance.
Meanwhile, a fierce battle is raging between banks and fintech companies to promote their term deposit accounts, which have long been overlooked. These accounts, which offer returns that increase the longer they are held, are sparking renewed interest among households. Deposits in these fixed-term accounts reached 407 billion euros in August, a 13% increase from a year earlier, according to the Banque de France.
Thanks to rising interest rates, these investments—which weren't yielding much just a few months ago—now offer attractive returns, reaching about 4% gross for a two-year lock-in period.
Term accounts are as easy to open as regulated savings accounts, but they are subject to strict rules. There are no fees for opening, closing, maintaining, or managing the account. The bank earns its revenue by taking a commission on the interest earned.
Funds must be deposited in a single lump sum; no subsequent deposits are allowed. Although the term account is not strictly locked, it is not recommended to withdraw funds before maturity, as this would generally result in a reduction in interest earnings.
The interest rate is guaranteed and fixed for a specified term, which can range from very short-term (a minimum of one month) to medium-term (three or four years). When the account is closed, the initial investment is returned along with the interest.
Please note that interest earned on the term deposit account is subject to taxation. It is subject to a single flat-rate withholding tax (PFU) of 30% upon receipt, which includes income tax (at a flat rate of 12.8%) and social security contributions (at a flat rate of 17.2%).
Competition among banks to attract savers is fierce, especially since savings accounts offered by foreign banks provide higher interest rates than those available in France, which explains their higher returns. Furthermore, the banking subsidiaries of automotive groups pay interest on their savings accounts using the profits generated by auto loans, which are generally more expensive than those offered by traditional banks. These institutions have every incentive to make their investment products attractive, since the funds deposited in term accounts are used to finance auto loans, which is less expensive for them than borrowing from the market.
