THE Government has yielded to lobbying by banks and cut the interest being paid on state savings schemes.
The move is a massive blow to savers as it is the third cut in just over a year in the interest paid on the tax-free savings schemes.
The changes also mean fewer prizes for those with Prize Bonds.
The reductions come just two weeks ahead of another hike in the tax on savings to 41pc – one of the highest tax rates on savings in the world.
Some €18bn of householder savings have been squirreled into the state savings products sold by An Post, but operated by the National Treasury Management Agency (NTMA).
The overall amount put into these products is up €1.5bn in a year.
Interest rates are now coming down on six of the schemes, most of which offered tax-free returns. The reductions in the rates on the schemes will not affect those with existing state savings, but will affect those putting money into the products from today.
The Irish Banking Federation recently admitted it was concerned about the attractive tax-free rates being paid out on state savings.
A spokesman for the NTMA, the fundraiser for the State, said it could not comment on whether it had cut rates due to bank lobbying of the Government.
It pointed out that the European Central Bank had cut its key lending rate to a record low of 0.25pc in November.
The spokesman for the NTMA said: "The new rates reflect the reductions in interest rates in the savings market and in sovereign bond yields generally."
Banks have been slashing the interest they pay on their deposit accounts for the past year-and-a-half, with some accounts paying as little as 0.01pc.
There is also a fear of a massive flight of cash out of bank deposits with the DIRT (deposit interest retention tax) rate due to jump from 33pc to 41pc next month. Some savers will also have to pay PRSI (pay-related social insurance) on interest they earn on deposits for the first time from January.
People who already have money in state bonds, certificates, instalment savings, and the national solidarity bonds will get the interest rates they signed up for at the start of the term.
But those with prize bonds will not be so lucky. The biggest cut is in the prize fund for Prize Bonds. This will mean there will only be 250 prizes of €100 a week, half the previous number. There will continue to be a €1m top prize every two months.
The total interest that can be earned on those putting money into the four-year National Solidarity Bond drops from 8pc to 6pc. Part of the interest paid is DIRT-free.
People who choose the tax-free Savings Certs will now get 10pc over five-and-a-half years. Previously, the certs paid 11pc over five years.
The six-year Instalment Savings product will pay 10pc over the term, down from 14pc.
And the 10-year National Solidarity Bond will have a total payout of 30pc, down from 35pc.
There is no change to the tax-free interest paid on the Savings Bond of 4pc after three years.