IF the political pundits are correct, then 1996 should be the Year of Prosperity the first for many a year for the ordinary worker/tax payer. More Irish people are expected to be in employment in 1996 and, care of the upcoming Budget, they can also expect tax refunds and lower tax rates in this New Year.
If this does happen and up until Budget Day, it remains a big if what investment/ savings options will be available in 1996? Will it be a year to take the plunge into stocks and shares and other savings vehicles for the first time, or should you concentrate on relieving yourself of personal debt?
On the product side, you should expect more of the same more tracker bonds, more guaranteed savings plans and pensions, more low DIRT savings accounts (though the Minister for Finance may be tempted to increase the DIRT rate once again). Cosy as these guarantees are, analysts are suggesting that the cautious route a throwback to the bad old days of the Crash, the Gulf War, the currency/interest rate crises may be inappropriate during a period of interest rate stability and a healthy Irish economy cum stock market, especially where investors have larger sums to invest, such as £10,000 or more. For smaller amounts and lower risk profiles the short term guaranteed trackers and other bonds, the two year SSAs and the Post Office savings certs and bonds that offer annual returns in the 6 per cent range are probably still good bets.
The Irish stock market is among the most impressive world performers at the moment, and its continuing good fortunes bode well for direct investors in the main stocks and for indirect investors in Irish pension or savings funds. A good, mixed portfolio with Irish and international stocks, a smattering of cash and gilts will be widely touted by financial advisers in 1996.
Where your tax savings is small in the few hundred pounds range you may be best advised to use that more to improve cash flow by reducing personal debt or to put it towards finally arranging adequate life or health insurance. With inflation so low and interest rates comparatively higher it is entirely to your advantage to pay off your debts. Even an additional £30 a month put towards a typical mortgage repayment can have the affect of cutting a number of years off the cost of your overall loan, all due to the fact that you are repaying capital sooner, thus avoiding future interest payments.
The same principle applies to other loans, though you must check with your lender first to see if they will allow you to change the terms of your repayment contract with out incurring any penalties.
Finance houses may be less sympathetic to any credit changes than would be the main banks.
If you decide instead to save or invest any tax windfall, there are plenty of options available, but you should first establish some basic goals, not forgetting about the need for adequate life insurance.
Depending on your age, as little as £25 a month could provide £100 000 of basic life cover for your family. It may also be enough to purchase private health insurance for the first time, giving you and your children an opportunity to avoid lengthening treatment queues in the public health system. VHI subscriptions also attract tax relief, though this has been clawed back in recent budgets.
If savings is the objective, you need to establish if this extra £30, £40 or £50 a month is being put aside specifically to pay, for example, school fees, to build a kitchen extension, to put towards retirement, or simply to create nest egg. Short term saving is now regarded by the financial institutions as anything from five to 10 years long. Because average returns are stable but relatively moderate (i.e. 5-6 per cent) any product you opt for needs to be in the "lo cost" category or you risk you growth being absorbed charges.
Bank post office and building society savings accounts are all low cost, but be careful of some guaranteed bonds and life assurance savings plans which still skim off a year's contributions in the form of commissions and set up costs and also levy substantial annual management fees. These high cost plans are on their way out, and 1996 will be the year when the life companies tackle the charges issue head on. (See Ark Life story below).
With a buoyant market, the savings plan that invests in stocks and shares and has low set up costs is nearly certain to offer greater rewards in the coming years than cash deposits. If European Union economic stability remains (another big if given what is happening in France) investors should be prepared for lower interest returns from the banks and building societies in 1996.
