Savers face rate cuts of over 40pc in State schemes
FUTURE savers will be hit by swingeing cuts in the interest rates paid on state savings products after banks put intense pressure on the Government to lower them.
The National Treasury Management Agency (NTMA), which manages the country's borrowings, is cutting the interest paid on products it sells through An Post by more than 40pc in some cases. The new rates come into effect today.
Tens of thousands of savers flocked to state schemes in recent years because of uncertainty over bank deposits. An average of €1bn is now invested in such products each year.
Although the schemes generally involve long investment periods such as five and 10 years, they were attractive to savers who had come to distrust main street banks.
Most state savings products are also tax-free, unlike regular savings where deposit interest retention tax (DIRT) is payable.
The lower rates will only affect new savings products sold through An Post. Higher rates paid on products already sold are not affected.
Following the changes, someone investing €10,000 in a five-year bond will earn €1,110 compared with €1,500 before. Investing €10,000 in a 10-year bond will bring interest of €3,500 instead of €4,500.
Simon Moynihan of financial website Bonkers.ie said that while the latest cuts are comparable to the declines this year in the rates offered by retail banks, there are now few attractive savings options for consumers.
Some €17.1bn of savers' money is tied up in state savings products – €1.7bn in prize bonds, €3.2bn in deposit accounts and installment savings, €5.7bn in savings bonds, €5.2bn in savings certificates and €1.3bn in the national solidarity bond.
Mr Moynihan said: "Even at the higher rate the NTMA was paying, it was still cheaper for it to get money from savers than to borrow."
The European Central Bank has reduced its key lending rate to an all-time low of 0.5pc, but the scale of the cuts being introduced by the NTMA are certain to catch savers by surprise.
* A 43pc cut in the interest rate for a three-year savings bond (fixed-rate total return falls to 4pc from 7pc).
* A 44pc cut in a four-year national solidarity bond (the rate drops to 8pc from 12pc).
* A 27pc cut in a five-year savings certificate (to 11pc from 15pc).
* A 12pc cut in a six-year installment savings product (to 14pc from 17pc).
* A 22pc cut in 10-year national solidarity bonds (to 35pc from 45pc).
Banks have been putting pressure on the Government to cut the interest rates on NTMA products sold through An Post because they are more attractive than what the institutions are offering.
Bank of Ireland (BoI), in which the State owns a 15pc stake, as well as AIB, which is almost entirely owned by the taxpayer, both lobbied the Government to have the An Post interest rates cut.
Consumers have been piling money into savings accounts and paying off debt as they fret about their financial security.
Household debt fell by €2.9bn in the last quarter of 2012 to €173.9bn, but the level per capita still remains high compared with other European countries.