State bond 'only benefits long-term investor'
THE new national solidarity bond is designed to be cheap funding for the Government, and will only benefit investors who keep their money in it for the full 10-year term, analysts said yesterday.
The bond will pay 1pc a year, before tax, with additional tax-free bonus payments for those who stay invested for five, seven and 10 years.
The tax-free bonus is 40pc for those who keep the bond for a decade, giving a gross return of 50pc.
This means that €1,000 invested for the full 10 years will grow to €1,475.
But the bond will only be worth investing in if the money is left in it for at least seven years, director of financial consultants Technical Guidance Tony Gilhawley has calculated.
An Post savings bonds and certs offer a better return over five and six years, he said.
"The national solidarity bond is what's called in the life industry a 'lapse-supported' product.
"In other words, the investors who bail out within the first five years and end up with 0.75pc return a year (after tax) end up subsidising the returns for the very few who will stick it out for seven to 10 years," he said.
Mr Gilhawley said the pricing of the bonuses after five, seven and 10 years assumed a certain proportion of investors would bail out within five years.
He said the bond was cleverly designed to be very cheap funding for the Government.
"A criticism in the past of life assurance with profit endowment policies was that people who cashed out early on poor surrender values ended up paying for large terminal bonuses paid to the few who keep their policies going to the end.
"This bond replicates this practice. If a private financial institution designed such an investment product, I'm sure consumer bodies and the regulator would be all over them," said Mr Gilhawley.
An Post savings certs, which pay 21pc interest with no tax over five-and-a-half years, outperform the new bond in years one through six.
Mr Gilhawley said the net annual return for the solidarity bond was 4.07pc, once the DIRT (deposit interest retention tax) was deducted and only if the bond was held for the full 10 years. The brochure for the solidary bond does advise consumers that anyone investing for less than 10 years may be better off considering other State savings products.
Financial adviser Karl Deeter of Irish Mortgage Brokers said the new bond would have very limited attraction for most people as the 10-year time-frame to get a decent return was too long.