An Irish Times guide to the world of personal finance.

SSIAs

Can I open a "token" SSIA now for €12.50, maintain it for four years and then in the final year jack it up to the max. That way I will be getting 25 per cent from the Government and 4 per cent from the bank, giving me a guaranteed one year return of 29 per cent. I appreciate this is not the spirit of the scheme but I cant help wondering if this is the case.

Mr J.S., e-mail

I realise some readers will be heartily fed up with SSIAs and their domination of this column in recent weeks. With the deadline looming at the end of this month, we are simply trying to clear up as many areas of confusion as possible.

Turning to Mr J.S.'s query, there is absolutely nothing to stop you saving within a special savings incentive account in precisely the manner you outline - apart from the fact that the minimum saving in euros is €12.70, not €12.50. In fact, the strong advice to everyone, from students to OAPs, is to open an account, even if only with the minimum amount.

The amount can always be adjusted upwards later in the way you describe. As it happens, a study by financial consultants Becketts indicates that the most important years for saving under the SSIA scheme are years four and five. It suggests that, where funds are limited, emphasis should be placed on investing to the maximum possible in those years. Basically, you only have to wait a year or two to get your money back, along with the Government bonus and any interest accruing.

Indeed, even people wary of their ability to save money regularly over five years should take part. Provided you make monthly payments for the first 12 months, you do not have to pay anything further. Equally, you can decide to stop paying for a period and then resume, depending on your resources.

The one thing to check is the flexibility available within different types of accounts. Fixed-rate interest deposit accounts may limit your flexibility and raising and lowering payments and investment accounts would probably not be suitable in these circumstances.

Even some variable rate deposit accounts have minimum thresholds of, say, €50 or €60 a month. ACC Bank has the best variable interest rate "guarantee" for those looking to save only the minimum - initially at least. It will match the current European Central Bank interest rate, effectively the Irish interest rate now that we are in the euro zone.

Whether this will get you 4 per cent in year five is a moot point. At the moment, the ECB rate is 3.25 per cent, although the expectation is that interest rates are unlikely to go lower and are likely to rise over the coming year or two.

I have opened an SSIA but have recently been thinking of getting a one-year visa for Australia. Will I have to close the account before I go or can I maintain it from there if I transfer funds to my bank account?

Ms G.H., e-mail

You will be able to continue with the account provided you are only going for one year, as you will still be ordinarily resident in the Republic and provided you continue to make payments into the account each month for the first year out of your own resources - in other words, no loans and no parental bail-out. Of course, after year one, you don't even need to make monthly contributions while you are away. If you want, you can simply take a payments holiday.

I see no reference to the effective rate of interest on SSIAs allowing for the 25 per cent and DIRT reductions. Could you enlarge?

Ms M.O'C., Dublin

Obviously, the effective interest rate depends on the 25 per cent plus whatever rate is available from the institution with which you are saving. According to a Becketts financial consultants report published last year, regular savers will benefit to the tune of 8.9 per cent per annum from the Government subsidy. On top of this, there is the rate of interest on the whole sum - the capital plus the Government subsidy - payable by the financial institution offering the special savings incentive account.

As to the tax, it is not DIRT but a specific tax applicable only to SSIA investments. It will be payable at a rate of 23 per cent on the interest accrued over the term of the SSIA.

My question is in relation to Hibernian Spectrum Save. I understand that Hibernian will not allow the fund to be subscribed to after the five-year period has elapsed, thereby forcing an individual to withdraw the funds and possibly invest the lump sum in another fund, incurring further charges. Would it not be correct to say that equity-based funds invested could suffer, considering that most experts would advise on a seven- to 10-year period?

Mr M.McK., e-mail

Hibernian has decided that the Spectrum Save product will be purely an SSIA-related investment. As such, it will not accept further investments after the five-year term although you can continue to have the money in the account at the end of the period invested in the fund. Certain other institutions are more flexible and will allow you to continue to invest in their SSIA-earmarked funds after the five-year term.

Hibernian will pay the SSIA tax due on the fund at the end of the five-year period. If you do decide to leave the investment alone, any further gain will be subject to exit tax, which is levied at 3 per cent over the existing base rate of income tax.

On charges, Hibernian says the charge structure will remain the same for those people who leave the sum invested beyond the five-year level. It is also likely to offer a transfer option to a new fund at that time, tailored to such investments.

Naturally, there is no word at this stage on what the charge structure of such a fund will be and it is quite possible that it will be higher than that applicable to Spectrum Save.

On performance, there are a few bulls who maintain that equity funds will produce admirable returns over the five-year period, especially given the recent bear market, which indicates room for improvement. On the other hand, the consensus view appears to be that there will be no return any time soon to the heady bull markets of recent years.

Equally, the consensus is that five years is, as you say, too short a time for equity funds to produce a return worth the risk of the investment as against deposit funds.

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.