Livret A Interest Formula Change
Thursday 07 February 2019
Tax free bank savings accounts in France have been hit by changes in the government controlled interest rate formula.
The Livret A is the most popular bank savings scheme in France, with most of the population holding an account.
The maximum deposit that can be held on an account is €22,950 per person, excluding interest.
The interest earned is completely free of income tax and the social charges, and the funds are instant access. No residence qualification is required.
However, over the past decade the government have been chipping away at the historic formula used to determine the rate of interest that applies on the account.
Until 2008 the rate was based on a formula derived from Euribor and the rate of inflation, regularly then offering attractive rates of interest on deposits.
As a result of the global financial crisis in 2008, although a link to the level of inflation was retained, a new more complex formula made it less generous, notwithstanding the subsequent fall in the level of inflation.
In recent years, with the level of inflation in France less than 1%, the new formula would have mathematically resulted in a rate of around 0.25% to 0.50%, an outcome that was politically unacceptable to the government.
Initially, and against the advice of the Bank of France, the government maintained a rate of 1%, before finally conceding in 2015 to a reduction to 0.75%.
On the pretext of seeking to secure favourable funding for the construction of social housing, in 2017 the government decided to maintain that rate until 2020, an historic low.
With inflation running at over 1% in recent years (1.7% last year) it means the rate on the Livret A has been negative.
At an individual level it may not be significant, resulting in a loss of around €100 each year for a saver holding €10,000 in their account, although at a national level it amounts to several billion euros, a huge windfall for the government.
Neither are matters going to improve, for from 2020 the historic link between inflation and the Livret A savings rate will be broken, with the introduction of a new formula, being the average of the rate of inflation and short-term interest rates, subject to a minimum rate of 0.50%. In other words, the rate would in general be less than the rate of inflation.
In addition, the rate will not be able to increase by more than 0.50% in any single review, which occurs twice each year, in February and August; previously the maximum increase was capped at 1.5%. Thus, if inflation in 2020 is running at 2.0%, with the rate currently fixed at 0.75%, it would only increase to 1.25%.
These changes will also impact on the other main tax free savings scheme, called the Livret de Développement Durable et Solidaire (LDDS), which is tied to the same formula.
Against the backdrop of insurgent street protests that have taken place in France about the pouvoir d'achat, the government is resisting calls for the rate to be reviewed, with the Budget Minister Agnès Pannier-Runacher stating: "Ce serait très pénalisant de revenir sur ce cadre."