An Irish Times guide to personal finance. Investment OptionsMy 10th issue National Savings certificates have now matured. Should I leave my investment for a further five years and six months, the interest rate quoted is 34.49 per cent tax free, equivalent to an annual average rate of 5.54 per cent if left for the full term
The Special Savings Incentive Scheme offering a fixed interest rate of 3 per cent, tax deductible, plus 25 per cent bonus, is an alternative. The institution compounds the saving and interest. Which of the two schemes is the more beneficial?
J.D., Dublin
On the surface, I can see why you might think the National Savings Certificate option is a viable alternative to the Special Savings Incentive Account for people like yourself, who appear to be wary of taking risks with their investments, but it is not. The secret lies in the bonus to which you refer in passing.
The Government is giving €1 for every €4 you invest in the SSIA scheme, a whopping bonus of 25 per cent. This is the element that puts the SSIAs ahead of any other investment option, especially for the risk averse. Granted, you will pay tax at the conclusion of the SSIA - and it is important that you leave the SSIA investment untouched for its full five-year term - but interest accruing and compounding on the investment more than matches the tax-free return on the national savings certificates.
Having said that, it does appear that you are not looking at the best deals on the SSIA front. I assume the 3 per cent fixed rate offer is what An Post is offering in opposition to its national savings certificates. However, only this week ACCBank has introduced a 4.5 per cent fixed rate for the SSIA scheme and a number of other institutions are offering 4 per cent. While An Post has made much down the years of the security of money saved with it, SSIA deposit savings are a secure investment for risk-averse investors, regardless of which institution holds the money. Remember, too, that there are no charges on deposit-based SSIA accounts wherever they are held.
Of course, there is more on offer than fixed-rate SSIA accounts. Leaving aside the equity-based investments which do not sound as though they would appeal to you, there is the option of variable rate deposit-based SSIAs. Interest rates are widely recognised as being near the bottom of the cycle, with possibly one more cut to come some time this year.
Thereafter, the likelihood is of rising interest rates. As one economist recently pointed out, at the bottom of an interest rate cycle, it is in the interests of borrowers to fix their rates, not savers.
You have to remember that this is a five-year investment. There are a number of institutions committed to paying at least the European Central Bank rate of interest on SSIA savings - and others currently paying in excess of that. As interest rates rise, so will these - whereas any fixed rate is immutable.
Whatever you decide, do at least look at rates offered by other institutions, as 3 per cent is not good value in the current SSIA market.
Unit Funds
I refer to the unit fund prices published in your newspaper. Could you explain the difference between the "gross" and "net" figures?
E.J.H., Wicklow
It is not as simple as different figures; these are, in fact, different funds. The difference is simply down to time and legislation.
Until the beginning of last year, all funds in the domestic Irish market were what is now referred to as "Net" funds. That means the gain in the fund was taxed each year at the standard rate, with only the after-tax or net fund continuing to be invested for the subsequent year.
Understandably, this reduced the potential investment gain from the fund as money was being deducted each year to pay the tax authorities. In addition, it raised the workload on fund managers as they had to deal with the administration involved in taxing the funds each year.
None of this was evident to the investors, who would receive the return on their investment at the end of the term, with standard rate tax already paid.
The Minister for Finance, Mr McCreevy, changed the system in Budget 2001, which came into force in January 2001. This essentially brought Irish practice into line with foreign norms, outside of Britain. Under these new "gross" funds, the money invested accumulates for the whole of the investment term, without attention from the Revenue.
Before the money is drawn down or upon maturity of the fund, the revenue levies tax at the standard rate plus 3 per cent - the same rate as applies on SSIA savings. The thinking is that the Revenue charges three percentage points over whatever is the current exchange rate to compensate it for not taxing the funds on an annual basis. At the moment, the standard rate is 20 per cent.
New funds opened since the introduction of the new system must follow the "gross" formula which is generally believed to be more beneficial from the investors' viewpoint. Any fund in which you now invest will be a gross fund.
The newspaper carries the data for "net" funds as a reader service for people who invested in these funds before the change in tax rules.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
