The Special Savings Incentive Scheme (SSIS), through which savers will get €1 from the Government for every €4 saved each month over a five-year period, closes for new business on April 30th.

But financial institutions offering Special Savings Incentive Accounts (SSIAs) have warned savers to open accounts well in advance of the official closing date to ensure their accounts can be properly set up.

Since each individual can only have one account, savers should examine the products on offer carefully to find the one best suited to their needs. The broad choice is between a deposit-type account offering a fixed or variable interest rate or an account in which the saver's funds are invested in shares or bonds.

The decision will depend on the saver's attitude to risk - deposit accounts are low risk and offer a certain return, while investment accounts offer the potential for higher returns with a trade-off of much greater risk.

Under the SSIS, the Government will give account-holders €1 for every €4 they save in accounts that must be maintained for five years. Savers can save between €12.70 and €254 per month; examine the tables to ascertain the minimum monthly amounts set by the different financial institutions for their accounts.

An account-holder saving €100 per month would have €25 added to their account each month by the Government. Over five years this saver will have saved €6,000 and the Government will have added €1,500, giving a fund of €7,500 before any interest or investment returns.

The 25 per cent Government subsidy is worth about 8.9 per cent per annum to an investor who saves over the full five years before any interest earnings.

Financial institutions are offering two broad categories of accounts - deposit-type accounts or equity-based investment accounts.

Savers opting for deposit accounts will have a relatively safe fund earning a fixed or variable interest rate return depending on the product chosen. Equity-based products involve higher risk because they are based on stock market returns, and the value of the original investment can fall as well as rise. While they involve more risk, there is the potential for greater returns.

Deposit Accounts

They are relatively secure, low-risk accounts that can carry a variable or fixed interest rate. The real risk comes from inflation: if inflation remains ahead of the interest rate paid over the five years of the scheme, the value of the interest and some of the saver's capital will be eroded, before the Government contribution.

But even without any interest from the bank or building society, a deposit-account saver is guaranteed a return of 8.9 per cent per annum on their savings because of the subsidy each month from the Government.

Savers opting for deposit accounts must choose between fixed or variable interest rates. This involves making a judgment about the future direction of interest rates. Most market observers now feel interest rates are at or close to the bottom of their cycle, indicating that it may be better to opt for a variable-rate account to get the advantage of any increases in rates over the five-year saving period.

But with many of the variable rates on offer now well above the current European Central Bank (ECB) rate of 3.25 per cent, there appears to be little upside potential in most accounts and, because the rates are variable, there must be a danger that they could come down, given that the best guarantee is the ECB rate and the worst is ECB minus 1 per cent (2.25 per cent).

Savers opting for variable-rate deposit accounts should look for the best combination of the highest initial interest rate, highest guaranteed ongoing rate and a low minimum contribution level, remembering that SSIAs are five-year products where returns will vary with market interest rates.

The most important rate for savers is the guaranteed minimum ongoing interest rate on offer.

At present the EBS 4.50 per cent rate with an ECB-0.5 per cent guarantee, and the First Active 4.25 per cent rate guaranteeing the ECB rate, are the best variable-rate products on the market.

All the variable-rate products on offer, other than the ACC Bank and AIB products, offer rates well ahead of the current 3.25 per cent ECB rate.

Some savers may prefer to opt for a fixed rate because they want to know the rate of return they will get over the period. They need to be wary of breakage penalties on early withdrawals.

Savers who cannot tie up their funds for five years should avoid fixed-rate products, other than from An Post and to a lesser extent Bank of Ireland. Early withdrawals from all SSIAs will be hit by a 23 per cent tax charge but, in addition, most financial institutions will impose a penalty charge on early withdrawals from fixed-rate accounts.

A fixed- or variable-rate account?

With variable-rate accounts, the interest rate is based on underlying market rates and will rise or fall with changes in the ECB rate. Over the five-year SSIS term, the rate of return is likely to change. Fixed-rate accounts offer a predetermined, guaranteed rate of return over the term - the Irish Nationwide 4.55 per cent per annum rate is fixed for the full five-year term.

Investment Accounts

There is a wide variety of accounts available, allowing savers to choose according to the level of risk they are prepared to take (see Table 3). Savers prepared to take a high risk could opt for a fund fully invested in equities, while savers who want medium or low risk could go for funds invested between cash, Government bonds, property and equities.

Savers who want to avoid risk could opt for a cash fund - a number of financial institutions are offering cash funds guaranteeing security of the saver's capital.

Investment accounts are operated on a unitised basis. Each month contributions are converted into units in the chosen fund and the value of those units depends on the performance of the assets in the fund. There are two main risks with most investment accounts - the value of the units could fall if the underlying investments perform badly and the charges on the fund could significantly reduce the return.

Savers need to examine the charges of the different institutions for managing and administering their savings (see page 3). Their return will depend on the product chosen, the performance it produces and the charges.

Deposit v Investment Account

The basic difference between a deposit and investment account is that an investment account provides the prospect of greater returns through the mix of assets invested.

However, the trade-off is greater risk to the saver's funds - the risk that the investment will not perform well and that paying the charges of the financial institutions managing the investment could wipe out much of the investment return.

The saver is risking that, at the end of the five-year term, his funds could be worth less than those of someone saving the same monthly amount in a deposit account.

Returns on investment accounts will depend on the performance of the investments in the saver's fund, while variable rates on deposit accounts can change with changes in ECB rates.

What to Do

Savers need to consider the type of account they want and the amount they can afford to save each month. They need to be confident they can continue to save at least the monthly minimum set under the particular product, for five years. Savers who take money out of the fund during the five years could lose out badly.

At the end of five years, the only tax charge on a saver's fund will be on the interest or investment return earned.

However, where funds are removed during the five years, tax will be charged on the full amount. In this case, savers could find they end up with less than they put in.

A saver who cannot continue to save should try to leave the funds already saved in the SSIA - the Government subsidy will stop but the fund will continue to earn interest/investment returns and the saver will avoid the penal tax on early withdrawal.