Q&A

Should I invest in the National Solidarity Bond?

Q

I see the Government has finally said how the National Solidarity Bond will work. I am still not sure if any money I put into the bond is guaranteed and whether I can take my money out at short notice if I need it. How does the interest rate compare with other savings on the market? Will I have to pay any Dirt on the interest?

– Mr N D, email

A

As you say, the Government last week set out how the National Solidarity Bond will operate. The bond, which was first announced in last year’s Budget, is designed to allow ordinary citizens get involved in helping to fund Government programmes during these straitened times.

Given the scale of our current indebtedness, many argue that the bond is simply window dressing. That may be so but, from your point of view, the more important question is how safe the investment is and whether the return is competitive.

The bond will be sold through post offices from tomorrow. The minimum investment is €500 and the maximum €250,000. It is open to anyone in the State, including children under 16 as long as they have written parental consent.

The Government says the money is 100 per cent guaranteed in the same way that investments in An Post savings certificates and bonds are guaranteed, even outside the recent bank guarantees. The bonds are overseen by the National Treasury Management Agency (NTMA), which is responsible for managing Ireland’s debt and how it is funded.

The interest rate is organised in an interesting way. The bond is a 10-year product. As currently constituted, the interest rate is just 1 per cent per annum. That’s not very attractive. What makes the bond competitive are tax-free bonus payments which kick in on a sliding scale after five years. On the fifth anniversary, a 10 per cent bonus is applicable. This rises to 22 per cent if you hold the bond for at least seven years and 40 per cent if you keep the money invested for the full 10 years.

While the interest paid is liable to Deposit Interest Retention Tax (Dirt), the bonuses are not. What this means, in effect, is that people holding the bond for the full 10 years will receive total interest/bonuses equal to 50 per cent of the original investment. After tax, the total gains amount to 47.5 per cent – equivalent to 3.96 per cent per annum.

This rate is competitive in the current market – savings certificates, for instance, offer 3.53 per cent per annum. However, remember that this rate applies only for those leaving their money invested for the full 10 years – the final bonus only kicks in at maturity – so you are locking your money in for a decade if you want that rate.

You should note that if you take your money out before the anniversary of your saving – say after four years and 11 months – you will not receive any interest, or bonus, due at the end of the fifth year. You can choose to withdraw only part of your funds, if necessary, leaving the rest to mature. Withdrawals require seven days notice.

You can hold more than one bond – as long as your total individual hold does not exceed the €250,000 limit. Each will mature 10 years after the date you open the account.

In terms of the interest rate changing, like savings certificates the NTMA can decide to close the bond to new entrants or to open a second issue on different terms and conditions. Existing investors will not be affected.

Fuller details are available at www.statesavings.ie.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@ irishtimes.com