Account holders must pay attention to paperwork before enjoying benefits of savings scheme, writes Laura Slattery

Special Savings Incentive Account (SSIA) fever has swept the country more than once since the scheme was announced by former finance minister Charlie McCreevy.

First, there was the last-minute rush to open an account by the scheme's deadline in April 2002. Next there was the creeping sense of unease among those who had signed up to equity rather than deposit SSIAs as they watched their funds plunge in value, as tumultuous stock markets temporarily wiped out the benefit of the Government's 25 per cent top-up (before the markets happily recovered).

Over the past year, however, the subject of countless financial institution surveys, golf course conversations and idle daydreams has been how, exactly, to spend the proceeds of the SSIA - a sum of around €20,000 for those who have contributed the maximum permitted sum of €254 a month over the full five-year term.

The first SSIAs mature on May 31st, just over three months away. An exact countdown to the first maturities for anyone who is interested can be found on the website www.spendyourssia.ie.

But before anyone gets too carried away by the prospect of getting their hands on all that cash, there is a little paperwork that must be sorted out first.

As part of the maturity process, all SSIA account holders must sign a declaration called the SSIA 4 and return it to the financial institution that sold them the account sometime in the three months before the maturity date of the SSIA.

The earliest date that the SSIA providers can send out the SSIA 4 forms is around three and a half months before the maturity date.

Next Wednesday, March 1st, is the earliest day on which SSIA holders can return this form. If they took out their SSIA in the early months of the scheme in 2001, they should already have been sent the SSIA 4 by their financial institution.

According to Gerard Harrahill, the Revenue Commissioner's collector-general, about 4 per cent of the total number of SSIAs will mature this May.

About 50 per cent of SSIAs do not mature until April 2007, meaning that anyone who only caved in to SSIA peer pressure in the final weeks of the account opening period won't have to worry about returning their SSIA declaration form until February 2007.

If the declaration forms are not signed and returned before the maturity date, the SSIA does not mature, it "ceases".

In a normal maturity, only the accrued interest or investment return is taxed at 23 per cent: the original savings and the 25 per cent Government bonus are not taxed.

But if the SSIA ceases, all of the savings in the account will be taxed at a rate of 23 per cent.

As signing the SSIA 4 form is therefore very important, financial institutions have agreed that they will send out a follow-up letter if the form is not sent back. Account holders whose SSIAs are within three months of maturity who haven't received the SSIA 4 should contact their SSIA provider for the form, Harrahill advises.

A change of address is one reason why the account holder may not receive the form that their SSIA provider sends them.

"SSIA providers send out statements on an annual basis showing the balance in the account. Anecdotal evidence would suggest that because SSIAs are so popular, customers have made sure that the financial institution knows where they are," he says.

The Revenue does not want to penalise people who have complied with the terms of the scheme but haven't sent the form back due to change of address or ill health, he adds.

"We are not going to be unreasonable," he says.

On the declaration form, SSIA account holders must confirm that they have met the following five conditions:

that they only hold one SSIA;

that they are the beneficial owner of the funds in the SSIA;

that they were resident or ordinarily resident in the State for the duration of the SSIA;

that the money they used to contribute to the SSIA came from their own funds and they did not use borrowings to fund it;

that they have not assigned or otherwise pledged the SSIA funds as security for a loan.

It is not too difficult to satisfy the residency conditions.

"There are people who have left the State only temporarily and their SSIA is still legitimate," explains Harrahill.

Each SSIA holder was required to be resident in the State - essentially living in the State - when the SSIA was first opened.

After that, they are obliged to be either resident or ordinarily resident until the SSIA matures.

However, a person does not cease to be "ordinarily resident" in the State until they are not resident here for three consecutive tax years. So anyone who went abroad for a continuous period of more than three years during the term of the SSIA will satisfy the residency condition.

Although they must have been resident in the State when they opened the SSIA, they do not have to be living here at the time of its maturity.

In the first year of the scheme, the Revenue followed up on a small number of cases where individuals opened more than one SSIA.

In some cases, people opened a second account on behalf of a minor, thinking they were entitled to do so.

The condition relating to using borrowed funds to contribute to the SSIA won't affect someone who has taken out a personal loan to enhance their cashflow, which in turn has been restricted by their ongoing SSIA contributions.

"The fact that somebody has a loan account and an SSIA does not in any sense suggest that they are funding the SSIA with the loan," says Harrahill.

While mortgage lenders can and have looked to loan applicants' SSIAs as evidence of a disciplined savings habit, a financial institution cannot, for example, accept an SSIA as security for a car loan.

If the terms of the scheme have been breached and the SSIA holder cannot sign the declaration, the full SSIA proceeds will be taxed at 23 per cent. Making a false declaration is an offence liable to a fine of €1,900, imprisonment of up to six months or both.

Financial institutions are obliged to advise the Revenue if they have reasonable grounds to suspect that a customer has breached the conditions.

The Revenue says that it will analyse how the maturity process works in the first few months.

"The vast majority of people with an SSIA hold one validly. We want this process to be as streamlined and straightforward as possible," says Harrahill. Some equity-linked SSIAs are designed to continue after the term of the Government bonus expires. However, the maturity tax is paid after the five years and the account is then treated as an ordinary investment product.

No further Government bonus is available, except for SSIA holders whose incomes mean that they are not subject to any tax at the higher rate of 42 per cent.

These savers will be eligible for a tax credit of €1 for every €3 of their SSIA proceeds that they reinvest in a pension.

The tax credit is available up to a limit of €2,500. The tax payable on maturity of the SSIA will also be waived on the proportion of the funds that are reinvested.

Under the current guidelines, eligible SSIA holders must reinvest some or all of their SSIA proceeds into a pension product within three months of the maturity of the SSIA in order to qualify.

Higher income investors are set to be the primary target of furious campaigns by financial institutions to get them to reinvest their money, even without the attraction of a tax credit.

If neither Government nor financial institution incentives work, over 1.1 million people could simply have fun embarking on the spending spree of all spending sprees.