Banking on SSIAs for financial security

A deposit account is an obvious choice for the risk-shy saver, but it is worth shopping around for the best rates, writes Caroline Madden

By the end of this month, more than half a million people will be faced with the enviable dilemma of what to do with their five-figure lump sum as the final tranche of Special Savings Incentive Accounts (SSIAs) mature.

Many reformed spendthrifts will no doubt fall back into their old "live for the moment" ways and fritter away five years of diligent saving with a few swipes of the credit card. More sensible savers, however, will use their lump sum as a stepping stone towards financial security.

For the risk-shy saver, who regards stock market investing as Russian roulette and suspects that the property boat has sailed, reinvesting an SSIA lump sum in a deposit account is an obvious choice.

The savings market has undoubtedly heated up in recent months, with enticing new products and interest rates being promoted by banks as they compete for the custom of SSIA holders.

However, although people who decide to continue their savings habit can now earn 7 per cent from a number of regular savings accounts, these high-yielding products do not cater for SSIA-sized lump-sum deposits.

One option for lump-sum savers determined to access the highest interest rates is to drip-feed their matured SSIA from a current account into a regular savings account.

However, few of these product providers allow monthly contributions to exceed €1,000, making it a slow process, and the uncompetitive rates available on "feeder" accounts diminish the allure.

Most SSIA providers automatically roll matured funds into a default deposit account, but these accounts do not necessarily offer the best terms, as providers are banking on the power of inertia to retain these funds. Rather than being complacent, SSIA holders should shop around for the most suitable deposit account in the lead-up to their maturity date.

Permanent TSB, for example, converts matured deposit SSIAs into bonus interest accounts, which pay an underwhelming 3.5 per cent interest rate. This doesn't even match the current European Central Bank (ECB) rate of 3.75 per cent, and is lower than rates available on other Permanent TSB accounts.

Anglo Irish Bank's default easy access account is marginally better, offering an interest rate of 3.8 per cent. AIB pays a healthier rate of 4.5 per cent on its default instant access account, but this drops to 3.75 per cent after the first three months.

Bank of Ireland (BoI) customers will find their matured SSIA converted into a special bonus saver account.

This account pays a competitive rate of 6.5 per cent on new regular savings between €20 and €1,000 a month. However, the interest rate on the lump sum is a lower 4 per cent for the first three months, before dwindling to the ECB rate.

Non-BoI SSIA holders can also open a bonus saver account, and can transfer their entire SSIA lump sum into it, but their new savings contribution will be limited to €500 a month.

"A headline-grabbing interest rate might look like a great deal but ask whether it would be paid on all, or only part, of your savings," the Irish Financial Services Regulatory Authority's consumer director, Mary O'Dea, warned recently.

"Some accounts only pay the headline interest rate on any lump sum you deposit, such as your SSIA funds. You may not earn this same rate on any further amounts you save.

"Similarly, some deposit accounts are geared towards regular monthly savings and you may not earn the higher rate on a lump sum over a certain amount."

Savers should scrutinise the fine print before handing over their nest egg, to avoid any nasty surprises further down the line, such as restricted access, withdrawal penalties, transaction fees, minimum balances and maximum deposits allowed in a given period.

"Ask your financial institution about how the interest is calculated, how frequently you can withdraw your money, what fees and charges or other conditions apply, and will your lump sum remain intact," O'Dea advised.

"Explain what you want from the account and ask is it the most suitable product for you."

The optimise account offered by EBS appears at first glance to be a hands-down winner, as it offers a rate of 5.25 per cent on matured SSIA funds and additional lodgements made by direct debit within the first three months.

However, a closer inspection reveals that the 5.25 per cent rate is only guaranteed for three months, after which it may drop as low as the ECB rate.

Online bank RaboDirect offers one of the best deals, paying 5 per cent on lump-sum savings up to a balance of €10,000.

However, the drawback is that a tiered rate applies for this account, with the interest dropping to a rate of 3.75 per cent on balances above €10,000.

Most savers who made the maximum contributions to their SSIA over the past five years will have amassed a fund in excess of €20,000, but for those who only wish to reinvest half of their lump sum, RaboDirect's offering is ideal.

For savers determined to reinvest the entire amount on maturity, AIB's five-year special term account is worth considering. The account should be able to accommodate all deposit SSIAs, as amounts of up to €25,000 are accepted, and it offers a competitive interest rate of 4.8 per cent.

However, for those who dread the thought of locking away their cash for another half-decade, a three-year option is also available from AIB, paying interest of 4.39 per cent annually.

Up to €635 or €480 respectively can be earned free of Deposit Interest Retention Tax (Dirt) on these term accounts each year. However, individuals should seriously assess their ability to deal with financial emergencies that may arise during the term of the account, because dipping into these funds before they mature is not an option.

If instant access is a priority, Northern Rock's demand online account may be more suitable. This internet account pays a variable rate of 4.3 per cent, but watch out for the harsh penalty lurking in the fine print. If the balance in the account drops below €1,000, the interest rate plummets to the prevailing basic savings rate, which is currently a minuscule 0.10 per cent.

The same penalty applies to Northern Rock's fixed rate bond, which pays a rate of 4.5 per cent unless the balance drops below €1,000.

First Active's elevator account offers one of the lowest interest rates of 4.11 per cent but, unlike many other deposit accounts whose rates may increase or decrease, this rate is fixed for the five-year term. Withdrawals are permitted, but they may affect the interest earned.

By shopping around and examining the fine print, savers can track down the most competitive product suited to their needs, and avoid the pitfalls of restricted offers, tiered rates and hidden costs.

However, they can't avoid the biggest drawback of all - inflation. Currently running at more than 5 per cent, inflation will unfortunately wipe out even the most generous rates being offered on lump-sum savings accounts at the moment.