Do new low rates for State savings affect tax?

The recent announcement of revised interest rates for State savings products makes pertinent the meaning of "tax free" as it applies to savings certificates and bonds. Are they free of all tax, or are they only paid without deduction of Dirt? Is the interest earned liable for income tax or to be included in annual return of income, and, if so, under what heading?

Ms RP, email

You’re quite correct. The recent sharp fall in the interest rates on offer on State savings does make the tax-free nature of the products even more important.

As recently as 2013, you could expect to get a return of 4 per cent on An Post’s three-year savings bonds. That has now slumped to 1 per cent for anyone investing in new savings bonds from last Tuesday. The new annual equivalent rate (AER) interest rate is just 0.33 per cent. That’s a cut of half a percentage point per annum for the figure that applied up to June.

Similarly, with Savings Certificates, which mature over five and a half years, back in 2013 (the 19th issue of the certificates), you would receive 11 per cent interest over the full period. And even up to last week, a return of 7 per cent was possible over the five and a half years: now that has fallen to 5 per cent , or less than 1 per cent per annum.

The latest cut reduces the AER to 0.98 per cent from 1.24 per cent previously.

There have been similar falls in interest rates on other state savings products sold through An Post and also in the prize fund for Prize Bonds.

These rates are set by the National Treasury Management Agency, the body responsible for managing Ireland's debt and ensuring the State has enough cash to meet its needs. As my colleague Cliff Taylor wrote in the paper last week, with money available so cheaply in the market generally, the NTMA (the State) does not need to look for money from its army of domestic small savers.

A second concern is the pressure the NTMA is under from commercial banks worried that their (very low) interest rates on offer for savings were being undermined by the State.

The NTMA last cut rates in October 2014, and before that in December 2013.

So, is tax going to make further in-roads into the meagre interest on offer. The good news is that it will not. The savings products on offer through An Post are not just free of Deposit Interest Retention Tax (Dirt), they are also exempt from income tax, PRSI and the universal social charge. And, for what it is worth, they are not subject to capital gains tax either.

That means that, even with the historically low interest rates on offer, they do remain a credible option for people looking for low risk savings options.

It is worth reminding people – especially those holding longer-term 10-year National Solidarity Bonds – that the new rates apply only to those people investing in new savings since June 7th.

Anyone who bought a 10-year bond in 2013, for instance, will receive cumulative interest of 35 per cent over the full period. If they buy a similar product now, they will get less than half that – 16 per cent – in interest on their investment in a decade’s time.

Will bank allow me pay off tracker mortgage?

I have a tracker mortgage with about €30,000 left over six more years. I could be in a position soon to pay it off. Do you think my bank (Ulster) would consider giving a discount if I could clear it in one swipe ? If not, I am happy to continue paying it at a current interest rate of 0.75 per cent.

Mr JP, email

Tracker mortgages are bad news for banks – and for more recent customers who are paying more for their variable-rate mortgages to allow the banks recoup losses on tracker products sold during the heyday of property lending.

That being so, you’d think they would be very open to the idea of making a deal to get them off their books. However, in my experience, customers appear to have found it difficult to get such deals approved. I’m not sure if it is because, in a modern bank, local advisers have little enough autonomy and err on the side of caution – sticking to the prescribed script provided in training – or what.

Still, in my view, it is certainly worth a try.The bank would clearly benefit from having the loan paid off early and it would make sense for you if you could get a meaningful discount to reflect that, ie, essentially the two parties would split the financial benefit from the exercise. In the same way that it makes no sense for you to frontload payments if there is no financial benefit for you.

Have a sense of what works for you before you approach them, check to whom precisely you should address such a query and put an offer to them in writing. Make it clear that you have no issue seeing out the loan but are offering this alternative as a mutually beneficial financial arrangement.

In any follow-up dealings make sure everything is in writing – including, if necessary, a written memo to confirm the contents of any phone call. Email will do but make sure you keep them, ideally printing them out.

At every point along the way, reiterate that the reason for the approach. In today's climate, it is all too easy to find yourself in the distressed mortgages in- box and that could create a really messy position for you unwittingly. Friends Provident In last week's response to the query about Friends Provident shares, I said the shares floated at 229p sterling. I have since been reminded by a reader in the UK that the price was 225p. The figure does not affect the substance of the answer.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice