Questions & Answers

I am a retired public servant and, in common with other public service officers, when I retired four years ago, I received a lump sum. Originally, this was invested in special savings accounts in order to provide a small supplementary income for my wife and I. In recent times, the value of SSAs has been almost totally eroded by falling interest rates and the increase in DIRT. Given that interest rates in Britain are much higher than in Ireland, would it be in order for a small investor like myself to invest in a British building society? Which are the safest ones in which to invest and what would I have to do? Also what are the tax implications?

Mr W.J.P., Dublin

Your question highlights a situation which is becoming increasingly common and will continue to do so as Irish rates fall further out of necessity to join forces with our future colleagues in the euro zone. Indeed, this has led some commentators to postulate that banks and building societies may be forced to levy charges on small customers to cover the administrative costs involved in handling their deposits in an environment where low interest rates are perceived to bite too deeply into profit margins. As you say in your letter, you are rapidly approaching a situation where, rather than the chance of your little nest egg providing a safe and welcome supplementary income, you will be lucky to get a rate of interest which will maintain the value of the lump sum against inflation.

Looking at the one-month deposit rates on offer from a range of institutions, I notice the best rate available for sums such as yours before the latest round of interest rate cuts was 5.75 per cent from NIB on a special savings account. The lowest, at 3.25 per cent, was to be found at Ulster Bank with its one-month fixed product.

Can you look to Britain? But of course . . . provided you can find someone prepared to take your money. You enclose in your letter a page of a British newspaper quoting rates from 7.4 per cent (Nationwide Building Society) to 8 per cent from a crowd called Egg for instant access accounts, figures that would have most Irish savers searching way back in memory banks for comparisons here. Of course, these figures also predate the latest 0.50 percentage point rate cut announced last week by the Bank of England's monetary policy committee. On a comparative basis, rates on a 30-day notice account at Scarborough Building Society come in at 7.3 per cent on a minimum £1,000 deposit. Interestingly, most of the accounts quoted in the British paper were of the postal or telephone variety, rather than accounts available through the institutions' branch networks - a factor which obviously cuts the overheads.

However, growing numbers of British mutuals have introduced strict new thresholds for new accounts, or even barred them altogether, in an bid to deter carpetbaggers - speculators who invest money in an institution merely to benefit from free shares in the event of that institution going public. The restrictions were introduced when waves of speculators threatened to destabilise the mutual sector earlier this year.

In terms of the safest one to invest in, the British financial services sector is a low-risk zone - at least in the area of deposit accounts. It seems to me it would be more a case of finding the most attractive rate on offer and discovering whether that particular account will allow you access.

In tax terms, you may face a hurdle. Income from abroad, including interest, will be taxed as income in Ireland given that you are resident and domiciled here. As a result you would be avoiding DIRT only to pay income tax at your marginal rate, which is almost certain to be higher than the DIRT bill. It all comes down to the interest accruing at the higher rates prevailing in Britain, offset by the currency exchange costs. Given the sum involved, you might do well to get a little advice from a fee-based financial adviser or an accountant with a sound knowledge of both the Irish and British systems. It might well be that you should look to a different vehicle to secure the value of your lump sum while allowing you an annual sum or annuity. Names of the first can be found on a register kept at the Central Bank; the various accountancy bodies - particularly the Institute of Chartered Accountants in Ireland - should be able to help with the latter.

Should I convert sterling savings accounts, which I hold both in the Post Office and banks in Scotland, to Irish pounds before January 1st, 1999 or is it worthwhile holding fire as Britain will be outside the EMU?

Mr B.M., Dublin

Anything to do with cash transfers between Ireland and Britain is subject to the lottery that is the currency market. This is so whether European economic and monetary union (EMU) exists or not. In fact, there is an argument that some of the risk of currency rate gambles will disappear once we enter the EMU in that the euro zone of 11 EMU member-states is likely to be a more stable area in relation to interest rates and exchange rates than Ireland would be on its own. However, this largely depends on whether the euro is seen as the strong currency to which it aspires or whether it comes under attack from speculators on the basis of the undoubted contradictions which will exist within the euro zone.

Sterling has traditionally been seen as one of the safe currencies to which funds move at times of crisis; others include the dollar and, of course, the deutschmark, which will no longer exist. While there is no guarantee that sterling outside of EMU and in a situation where the economy there has its own problems will continue to be viewed as a safe haven, but it seems likely at least in the teething phase of the euro. If so, that would only serve to enhance the exchange rate between Scotland and Ireland in favour of the former.

Whether you transfer your funds before or after EMU will also involve commission costs - either between sterling and the Irish pound or sterling and the euro for as long as sterling remains outside EMU. Of course, this might be avoided if, as seems increasingly likely, Britain joins EMU at a later stage. Unfortunately there is no saying exactly if and when that might be and you might well need access to the funds prior to then. Only you can judge whether it is worth holding off in the hope that you will not need to use those funds while commission costs continue in force between Scotland and Ireland.

A further consideration is interest rates. Certainly, in the short term, rates in Britain are set to remain above those pertaining within the EMU, including Ireland. This is despite the recent downward trend in British rates. Remember that even with last week's cut of half a percentage point in British rates, at 6.75 per cent they still stand well above the current Irish rate of 4.94 per cent - and Irish rates are committed to falling further. They must mirror rates within the euro zone by the end of the year and that looks set to be about 3.3 per cent. There is little chance of British rates falling lower than that within the same timeframe.

Indeed, there is speculation that rates within EMU might fall even further in its first year - albeit the need to present an image of a strong currency means they are likely to remain higher than economic circumstances in the euro zone as a whole might warrant. This view has been lent added credence by the pronouncements of a series of German and French central bankers at the end of last week. As long as interest rates in Britain are so much stronger than here, your money stands to earn more over there.

So, in assessing the best place for your deposits, you need to weigh up interest rates, currency fluctuations and a possible entry of Britain to EMU.

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