The Government Special Savings Incentive Scheme (SSIS) opened for business on May 1st. Savers - who will be given £1 (€1.27) for every £4 they invest each month over the five years of the scheme - have until April 30th, 2002, to open a Special Savings Incentive Account (SSIA). The minimum monthly saving amount required to participate is £10, while the maximum allowed is £200.
To benefit under the scheme savers need to have an SSIA with an approved institution, and only one account per person is allowed. Most financial institutions are offering products under the scheme and there is a wide range of accounts on offer. Broadly, the choice for savers is between a deposit account or an investment account. Table 1 shows projected returns on deposit and investment accounts. Savers should note that only fixed interest rate deposit accounts offer a guaranteed return. 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 European Central Bank (ECB) rates.
Financial institutions are reporting strong interest in deposit accounts, with a slower take-up of the more complicated investment accounts. Deposit SSIAs: SSIS deposit accounts are similar to ordinary deposit accounts, which offer a regular interest payment, but they have the advantage of the addition by the Government of £1 for every £4 saved. They are relatively secure, low-risk accounts that can carry a variable or fixed interest rate, depending on the account chosen. The real risk comes from inflation: if inflation remains ahead of the interest rate paid over the five years of the scheme, it will erode the value of the interest and, possibly, some of the capital. 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.
Table 2 and Table 3 (inside) show the latest variable and fixed interest rates on offer for SSIAs. Since the ECB reduced its interest rate by one-quarter of a point on May 10th, some institutions have reduced the rates they are offering.
Investment SSIAs: A wide variety of accounts is available, allowing the saver to choose an account that suits the level of risk he is prepared to take. Those prepared to take a high risk could go for an 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 for the saver.
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. But 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.
A saver opting for the fixed-rate An Post account, for example, would get an interest return of 4 per cent per annum. There are no charges on deposit accounts - banks and building societies make their profits from lending on the savers' funds. Savers opting for investment accounts need to consider the charges applied by financial institutions for managing their accounts when assessing likely returns. To meet the return on an An Post account, an investment account with average charges of 2.4 per cent would need to produce a return of 6.4 per cent. Where the charges are above average, the return the fund needs to achieve would be higher - this is why savers should assess the competitiveness of the charges on an account.
This level of return does not include a risk premium for the investment account saver. If a risk premium of 3 per cent was included, an investment account with average charges would have to generate a return of 9.4 per cent.
Variety of investment accounts: Within the wide range of investment accounts on offer, savers can choose the level of risk they are prepared to take. Savers interested in the investment route should look for accounts where the charges are competitive, where a good range of investment options are offered and where the saver can switch between funds over the five-year life of their account.
The ability to switch is important because a saver who, for example, opts for a high equity content at the beginning of the five-year period may want to reduce the risk to their funds as market or economic conditions change. Savers should ensure that the institution they choose offers the option to switch and has a range of funds available to switch into.
Warning: The benefits of the SSIS for savers are obvious. However, savers need to be wary if they are advised to cancel existing regular premium investment plans in order to transfer into an SSIS account, according to Mr Norman Barry from Becketts Employee Benefits and Personal Financial Consultants. Savers should try to take part in the SSIS but it is important to evaluate the effect of the cancellation of existing investments on a return-versus-cost basis, he advises. It is important to find out the value of the plan the saver is proposing to cancel so that the saver can clearly assess the losses/gains involved. If the existing plan provides a healthy return on contributions applied, the saver needs to weigh up any decision to cancel carefully. However, where the surrender value (encashment value) is less than the contributions paid in or the investment does not provide an adequate return, the decision to cancel will crystallise this underperformance/loss. In some cases, where contracts are less than two years in existence, there may be no value attaching to the cancelled plan because of commission and other charges taken out of the saver's early payments. Savers should evaluate any proposed change in financial terms in order to make an informed decision.
