A term deposit for your savings

Are you looking to grow a sum of money while waiting to use it for one of your projects? Do you want to diversify your investments without taking risks? Have you considered a term deposit? An alternative to traditional savings accounts, this type of product offers a guaranteed interest rate over a predetermined and known period. myLIFE provides you with some details.*

For several years now, Mathieu has been trying to manage his assets as best as possible by regularly setting aside money and diversifying his investments. He has several savings accounts, a life insurance policy, and even invests a little money in an investment fund. To help him optimize the management of his capital, he was inspired by the concept of the investment pyramid, which involves distributing his money between diversified and liquid investments (money is quickly available) and more risky long-term investments, but in principle, more profitable.

The young man now has a sum of money he would like to use to finance the significant renovation work planned for his apartment in a few months. Rather than letting his capital sit idle in an account until the start of the project, he would like to find a way to make it grow further, but without risking a decrease in capital. The term deposit could be an interesting solution.

What is a term deposit?

A term deposit is a savings product. The saver can deposit a sum of money that is locked in for a predetermined period and remunerated at a fixed interest rate established by the bank when the contract is signed.

The term deposit allows you to grow your capital without it being locked up for too long a period.

This type of product can be considered an interesting option when you have a significant amount of money (inheritance, proceeds from a real estate sale, company cash surplus, etc.) that you wish to use in the short or medium term. The term deposit allows you to grow your capital without it being locked up for too long a period.

How does it work?

The term deposit is an investment accessible to individuals, but also to self-employed individuals and businesses. To access it, Mathieu will need to have a bank account with the bank offering the term deposit. He will be able to choose the investment currency from all those offered by the institution. He will also decide on the duration, that is, the period during which his capital will be immobilized: 1 month, 3 months, 6 months, or 12 months, for example. These durations may vary depending on the banking institutions. The sum must be paid in a single installment at the time of signing the contract, and Mathieu must respect the minimum amount to be deposited (set by the bank). The interest is usually paid at maturity, and the interest rate is fixed. It will depend on the amount invested, the duration of the deposit, and the market rates according to the chosen currency.

At the end of the contract, Mathieu will have two options:

• • Renew the term deposit: he can then reinvest the amount of his savings (with or without the accumulated interest) or choose to decrease or increase the amount to be redeposited. The client can also modify the duration in case of renewal. The interest rate will be updated.
  • Close the term deposit: the capital and interest will then be transferred to his current account.

Why choose this type of investment?

Mathieu is interested in this savings product that he has just discovered. It could perfectly match what he is looking for with the money he has set aside for his renovation work. This would allow him to grow his savings without the risk of capital loss, over a limited period. He could then recover his capital, plus the accumulated interest, in time for the start of his project.

Here are the advantages he highlighted:

• • The investment is secure, with no risk of capital loss**. It is therefore not only suitable for cautious investors with a defensive profile, but also for all other profiles within the framework of managing their liquidity.
  • The duration of asset immobilization is chosen and limited.
  • Savings are available at each maturity date.
  • The interest rate is guaranteed and fixed for the entire duration of the immobilization of the funds.
  • The return is known from the time of subscription.
  • There are no management fees.
  • The capital is protected by the Luxembourg Deposit Guarantee Fund (Fonds de garantie des dépôts Luxembourg) up to €100,000 per person and per bank.

However, he also notes some disadvantages:

• • The capital is immobilized for the entire duration of the contract.
  • Withdrawing money before the end of the contract, when the financial institution allows it, incurs financial penalties (except in the case of death).
  • The minimum subscription amount can be high.
  • For Luxembourgish resident savers, the interest is subject to a withholding tax of 20% (RELIBI).

Attention: Foreign residents who have a term deposit in Luxembourg should inquire about tax obligations in their country of residence. In principle, they must declare this income (investment income) in the annual tax return of their country of residence. The bank provides them with a tax report for this purpose.

Example

Mathieu decides to open a term deposit and deposit €30,000 for a duration of 6 months. Let’s imagine that the annual interest rate is 2.00%.

• • €30,000 + 2.00% x €30,000 = €30,600.
  • Interest for one year = €600.
  • Since the term deposit is for 6 months: 600 / 2 = €300 in interest.
  • So, a total of €30,300 at the end of the period.
  • A withholding tax of 20% is applied to the gross amount of interest, which is 20% of €300 = €60 in taxes.
  • €30,300 – €60 = €30,240.

The young man will ultimately receive €30,240, which means €240 in net interest capitalized over 6 months.

The term deposit seems to be an interesting alternative for Mathieu, who wants to grow his capital over a fixed period. With this product, he takes a cautious approach aimed at making his money work without taking risks and being able to access it when needed. Before starting, he can consult his banker to get more information and ensure that the investment meets his expectations (investment horizon, profitability, etc.).

* Content translated from French by the BIL GPT AI tool

** The capital deposited in a term deposit is protected by the Luxembourg Deposit Guarantee Fund (FGDL), which covers up to €100,000 per person and per bank.