Banks compete to lure savers cashing in on `free money'

The Special Savings Incentive Scheme, which opened for business on May 1st, is aimed at encouraging people to save regular monthly sums over five years. The scheme offers an incentive of £1 per month for every £4 saved in an approved deposit or investment Special Savings Incentive Account (SSIA). The minimum amount that can be saved by each individual each month is £10 while the maximum is £200.

Every month the Government will add the subsidy of 25 per cent of the amount saved that month by the individual - it will be credited to their savings account. Every Irish resident aged 18 years and over can open an account. Only one account per person is allowed. Accounts can be opened between May 1st, 2001 and April 30th, 2002.

To open an account a saver must supply their Personal Public Service Number (PPSN - usually your old RSI number) to the institution whose product they opt for and sign a Revenue declaration form (see inside).

With the lure of "free money" from the Government expected to attract a huge public response, most financial Institutions have launched new products to compete for savers.

Products on offer range from relatively secure deposit type accounts to medium to high risk investment type accounts.

Today, in the first of two reviews, The Irish Times in association with Becketts, the independent Employee Benefits & Personal Financial Consultants, has assessed the deposit accounts on offer.

A review of the investment accounts will be published in Business this Week next week. Savers must decide which product and supplier combination will best meet their own particular savings objectives.

They must first decide how much they can afford to save each month - because even though that amount can be increased or reduced through the life of the scheme, some institutions have set minimum entry levels for their own particular products. Remember it is a fiveyear savings term with tax penalties for early withdrawal. Then savers should decide the type of product they want - broadly the choice is between a cash deposit account or an investment account where their funds will be invested in a mix of equities, property, government bonds and cash.

Once that decision is made savers can use the tables (prepared by Becketts) this week and next week to find the financial institution that offers them the best deal.

A deposit or investment ac- count?: The decision boils down to the individual's attitude to risk and security.

Deposit accounts are very low-risk. The saver's capital is relatively secure and returns (interest paid) on most accounts are linked to the European Central Bank interest rate.

And, unlike investment accounts, there are no charges on deposit accounts - the financial institutions make their profits on the difference between the interest they pay to customers and the interest they earn from lending on the funds deposited with them.

Equity-based investment accounts do not offer a guaranteed return and values of the investment can fall as well as rise.

While these products carry risk they offer the prospect of a better return than deposits if the markets to which they are linked perform well.

The extent of the risk from low, medium to high and the investment performance of these accounts will vary between the products on offer, depending largely on the mix of shares, cash, government bonds and property as well as the investment style and targets of the financial institution offering the product. These accounts will be assessed in Business This Week next Friday.

But savers who opt for equity based investments will have to weigh up the impact of management and other charges and the relatively short investment term on their likely return.

Some experts feel a five-year term based on monthly savings (an average investment term of 2-1/2years) is not long enough to generate a sufficient return after charges for the risk taken.

"It is highly debatable if a savings term of five years is suitably long enough for a regular saver to benefit from the swings and roundabouts of an equity based investment, without some guaranteed return," according to Mr Norman Barry from Becketts (see risk/return inside).

Others, however, feel it is a good time for savers to get into equities with the markets at relatively low levels.

A variable or fixed interest rate deposit?: Savers can opt for fixed or variable rate accounts.

With variable rate accounts the interest return can go up or down, depending on changes in the ECB rate.

With fixed rate accounts the return is set at the start but savers can be penalised if they withdraw their funds early..

Impact of inflation?: Inflation will be a concern with deposit accounts. The March Consumer Price Index figures gave an annualised inflation rate of 5.4 per cent. With inflation at that level, deposit rates ranging from 3.75 per cent to 4.75 per cent do not protect the value of the saver's capital. They are depending on the government subsidy to provide positive growth.