STORY OF THE WEEK: With 1.25 million accounts opened, Mr McCreevy has had to recalculate the amount the Government will have to pay, writes Mary Canniffe

The last-minute rush for free Government money means an estimated 1.25 million people opened accounts under the Special Savings Incentive Scheme. While the final tally will not be available until mid to end-May - the Minister for Finance, Mr McCreevy this week asked all the financial institutions to send in details of the number of accounts they have opened - it is clear the scheme will cost the Exchequer considerably more than initially estimated.

All the financial institutions offering Special Savings Incentive Accounts (SSIAs) reported a huge increase in the number of customers opening accounts in the last three or four weeks of the scheme, which closed last Tuesday, April 30th. In the final days of the 12-month period in which people could open accounts, customers were going from institution to institution trying to beat the queues.

Under the SSIS - possibly the greatest ever free money offer from the Government - savers will get €1 for every €4 saved each month over a five-year period. Monthly limits of a minimum of €12.50 and a maximum of €254 were set, and there were penalties to discourage people from taking their money out before the end of the five-year savings period.

Announced in the 2001 Finance Bill and aimed at dampening down consumer spending and boosting flagging savings rates in a buoyant economy, the scheme had its critics, including some ministerial advisers in the Department of Finance. There was concern about the ultimate cost of such a scheme to the Exchequer and the difficulties in estimating what that cost would be.

Some advisers warned that, rather than increasing the overall level of savings, it would just entice participants to deflect existing savings or pension provisions into the new accounts. Another concern was that the free money would go largely to middle-and higher-income individuals because the conditions set made it difficult for lower-income individuals to participate.

On top of that, there was concern about what would happen at the end of the five-year savings term - 2006/2007 - when the savings funds mature and savers could go on a spending splurge.

What the scheme will cost the Government in the long term will depend not just on the number of people who opened accounts and the amounts they initially agreed to invest each month but on the monthly amounts they actually invest over the five-year period and the extent to which individuals break the terms of the scheme and suffer penalties.

Taking industry estimates that 1.25 million accounts have been opened, and using an average monthly investment of €127 - half the maximum allowed - some €1.9 billion would be saved in the accounts each year. Based on these figures, the bonus could cost the Government €476 million per annum and €2.38 billion over five years. But this calculation does not allow for any break penalties and is based on an average monthly figure, which could vary sharply over the life of the scheme.

Tentative Department of Finance costings before the scheme was announced estimated a full-year cost of about €127 million. In the Dáil in November 2001, Mr McCreevy accepted that estimate would need to be revised upward if "the take-up turned out to very strong".

Introduced in May 2001, the initial take-up was modest. The cost to the State for the first six months was just €55.2 million. In November 2001, Mr McCreevy raised his full-year cost estimate to about €140 million.

By the end of December - eight months into the scheme - just 380,000 accounts had been opened. But the take-up gathered pace from the beginning of 2002 and accelerated again in the four to six weeks before it closed on April 30th.

Answering a Dáil question on April 23rd, Mr McCreevy said the scheme cost the Exchequer €154 million from May 2001 to end March 2002 and increased his full-year cost estimate to €300 million. The final uptake indicates the cost will be higher.

It is too early to assess the level of new savings generated by the scheme. Most institutions saw customers switching from either existing term or other savings accounts, or from equity-based products or drip-feeding maturing life policy funds into new SSIAs. While some institutions report a significant level of such switching, they say it will be some weeks before they can give exact figures on the amount of new savings taken into SSIAs.

Early industry figures give some indications of average contributions, and saver age and gender profiles. At the EBS Building Society, 73,000 accounts were opened, well ahead of its expected 60,000 accounts. Most customers, 72 per cent, opted for deposit accounts with just 28 per cent choosing equity-based or investment accounts. The average monthly contribution was €167 with, as expected, the average contribution rising with age (see table).

A gender breakdown shows that 54.2 per cent of the EBS accounts were opened by female customers, who were more risk-adverse than male customers, with 84.4 per cent opting for deposit accounts compared with 70 per cent of male customers.

More younger people opened accounts in the closing weeks of the scheme, according to the EBS. The age profile of its SSIAs shows that 36 per cent of accounts were opened by people aged 35 years and under.

At AIB, 56 per cent of deposit account holders are female, 53.3 per cent are homeowners and just over 34 per cent have undertaken to save the maximum €254 per month. Over half - 51.5 per cent - of AIB's SSIA deposit account holders earn between €15,000 and €50,000 a year.

At Irish Life, 56,000 equity-based accounts were opened, involving customer investment of some €130 million in the first 12 months. About 56 per cent of the customers were male and their average monthly contribution at €199 was higher than the average female contribution of €189. The average age of the Irish Life investors was 42 years and half of its account holders aimed to save the maximum monthly sum of €254.

The big question now is what will happen when the accounts mature between May 2006 and April 2007. Will a wall of money - currently estimated at around €12 billion between the amount saved and the Government bonus, not allowing for any interest or investment returns - flood back into the economy and drive up inflation. Or will people have developed a savings habit and continue to save when the incentive is removed.

Most financial institutions are expected to offer some incentives to encourage savers to leave their funds with them and tax-based incentives could be used by the Government if there are fears of inflationary pressures. These could range from incentives to transfer SSIS savings into pension funds such as the new Personal Retirement Savings Accounts or additional voluntary contributions, offering a terminal bonus where a saver agrees a later maturity date or innovative new savings schemes developed by financial institutions to scoop what will be a lucrative market opportunity.