Savers to get £1 a month for £4 saved

Savers will be able to get £1 from the Government each month for every £4 they save under a new scheme to be introduced in May. The Government will add 25 per cent each month to the amount saved.

The cash payment by the Government is equivalent to a return of about 9 per cent after tax each year. A saver would need to earn about 11 per cent per annum on a deposit account to make the same return.

In a full year the scheme could cost the State up to £200 million (€254 million) if half of the households in the State took up the scheme and saved about half the maximum monthly amount allowed.

Launched in Finance Bill 2001, the scheme is aimed at encouraging people to save rather than spend, "to provide for the rainy day", according to Mr McCreevy.

Under the scheme an individual will be able to start saving or investing from a minimum of £10 per month up to a maximum of £200 from May 1st. The individual will have until April 30th 2002 to open a special savings incentive account under the scheme.

For every £4 a saver puts into their special account the Government will put in £1, or 25 per cent of the amount saved. This cash from the Government will be credited directly into the savers account each month over the life of the account and is the equivalent of giving tax relief on the savings at the standard rate of income tax.

Savers can put their cash into any type of approved savings/ investment product offered by a wide range of financial institutions from banks, building societies and credit unions to life assurance companies and fund managers. A saver's account can consist of deposits, shares, government securities, collective funds or life assurance products or a mixture of products. Up to 40 financial institutions are expected to put products on the market, according to Mr McCreevy, who said he expected customers to benefit from a competitive market.

To get the maximum benefit under the scheme a saver must save and leave the funds in their account for five years. At the end of the five year period the fund will crystallise and the saver will pay tax at a rate of 23 per cent on the interest/gains made over the period. There will be no tax on the amount saved or on the amount put in by the Government.

After the first year a saver can vary the amount saved each month, saving any amount up to £200 per month over the remaining four years. But where a saver withdraws funds before the five year period the penalty will be tax at 23 per cent on the full amount withdrawn.

All Irish residents aged 18 years and over can open a special account with only one account allowed per individual. To open an account an individual will have to supply their PPSN (personal public service number) to the financial institution. Over the five year period individuals will be able to transfer their special saving incentive account from one fund manager to another.

The special accounts will be attractive to people currently saving in low interest deposit accounts. They could lead to a switch out of post office savings schemes. Whether the scheme will prove attractive to other potential savers/investors will depend on the products the financial institutions bring to the market and the level of returns they are prepared to offer.