State saving plans still 'excellent' value, say experts
Published 19/12/2012 | 05:00
STATE savings products still offer some of the best value in the market, despite a big cut this week in the interest paid on them, experts said.
And there is no tax on a number of these savings options.
Savers received a massive blow after the interest paid on the tax-free savings schemes was sharply cut.
The move comes just two weeks ahead of another hike in the savings tax, to 33pc.
Some €15bn of householder savings have been squirrelled into the state-savings schemes sold by An Post, but operated by the National Treasury Management Agency (NTMA).
From Sunday, interest rates came down by between 0.35pc and 1pc for those who now take out state-savings products.
Existing investors in savings bonds and savings certs will be unaffected by the changes.
But actuarial consultant Tony Gilhawley said the products were still good value, despite the drop in interest rates.
"The returns are still excellent, but just not as excellent as they were last week," he said.
The annualised rate for the state-savings bonds, which are a three-year investment, has come down to 2.28pc. This works out at a total of 7pc if the money is left untouched for three years.
No DIRT (deposit interest retention tax) is due on the interest paid on the bonds.
Mr Gilhawley calculated that a saver would need to be getting an interest rate of 3.4pc a year from a bank to match this, as they would have to pay DIRT. Interest is paid on this every year.
Only those on small incomes, those who are over 65 or incapacitated can avoid DIRT.
The interest rate on five-year savings certs is now 15pc, or 2.83pc a year. Consumers need to leave the money invested for the full term to benefit from the best return. Interest applies every six months on the certs, but there is slightly higher interest paid in the later years.
A bank saver would need to get 4.22pc a year for 2013 to match the tax-free annualised return from savings certs, Mr Gilhawley said.
DIRT goes from 30pc to 33pc from the start of next month.
From January 2014, pay related social insurance (PRSI) will apply to interest paid on bank savings.
Banks had engaged in a fierce lobbying campaign to have the savings rates on state schemes cut.
They have been reducing savings rates on their own products since the summer, and the interest they pay is taxed.
A spokesman for the Irish Banking Federation said it was unfair that state-savings schemes had higher interest rates and no tax on some of the products.
There is no tax on savings bonds, savings certs and instalment savings, while the bonus on National Solidarity Bonds is also tax free.