Uncertainty over bank guarantee

DOMINIC COYLEanswers your personal finance questions

Q FOLLOWING YOUR Q&A re extending the bank guarantee in last week’s edition of the business section, I took the liberty of phoning the Department of Finance to gain some clarity on this subject.

I was informed that any funds on deposit on or before September 29th, 2010, (the expiry date of original guarantee scheme), in the six Irish financial institutions guaranteed under this scheme will be further guaranteed under the extended scheme, which would expire in 2013.

Any funds deposited above the €100,000 statutory guarantee after that date (September 29th, 2010) will not be guaranteed. Could you please clarify this for me?

Ms CD, e-mail

A One of the problems with the guarantee at the moment is that there is very little clarity. However, the day after last week’s Q&A, the European Commission approved plans submitted by the Government for an extended bank guarantee. This will be more limited in scope but I am given to understand by Government sources that it will include bank deposits.

Clearly protection for demand deposits can be applied closer to the end of the current guarantee, which expires, as you say, on September 29th, 2010.

The more pressing need, from savers’ point of view at least, is in relation to term deposits.

With less than a year to go to the expiry of the current bank guarantee, and in the absence of certainty, there can be little prospect of the bank selling term deposits of more than nine months’ duration.

In this regard, to be fair, the commission approval does shed some light. Its release last Friday states, in part, that “the new guarantee . . . extends to instruments with a maturity of up to five years. . .The instruments guaranteed under the scheme may be issued from December 1st, 2009, until June 1st, 2010.”

That would appear to indicate that savings products sold between the start of December and the start of June will be covered for up to five years – ie until June 1st, 2015, at the latest.

For more details, go to the EU website www.europa.eu and search for IP/09/1787.

Of course, this cannot take effect until the Government introduces legislation extending the guarantee, which it intends to do by statutory instrument. I am told this is imminent, ie some time in the next month.

Q I am in my mid-20s and would like to invest a modest sum, €5,000 to €10,000, for, say, three to five years. Perhaps with markets generally quite low at the moment a managed market fund would be a good option.

Can you give any advice on selecting such a fund, or indeed any other opportunities that might suit?

Ms CC, e-mail

A It is encouraging in these torrid times to see that some people are seeking to venture back into the medium-term savings markets.

However, it is an area in which you need to tread carefully. The solvency of our banks is not yet beyond dispute, although the extended guarantee will help when it is introduced.

As for the broader investment markets, it is true that they are considerably better value than they were at their height.

However, while the markets have bounced back strongly from the lows hit last February, many analysts are concerned that this is only a temporary reprieve. As such, it would a brave investor who would take significant stock market risk with their funds at this point. You could catch the market perfectly . . . but you could also take a heavy financial hit.

As you will see from our main feature (right), in the current uncertain environment, many people are putting their funds into easily accessible regular savings.

In terms of specific advice on particular funds, I am not in a position to advise you.

Only people registered with the Irish Financial Services Regulatory Authority are licensed to dispense such advice and that certainly does not include me.

The regulator has a list of registered advisers on its website, www.financialregulator.ie.

Q While Dirt can seem to be discharging your tax liability, it is not clear to me whether the health levy and now the income levy are charged in addition.

I have looked at the website of the Revenue Commissioners but failed to find an answer with regard to the health levy.

With regard to the income levy, certain “types of interest” are excluded, which might mean regular interest on savings is included. Could I ask you to check this?

Ms SMcC, Dublin

A I have received a number of letters this week on the issue of the health levy and Deposit Interest Retention Tax (Dirt).

As you note, there is also some confusion about the issue of the income levy, which was nominally levied on all income, and bank deposit interest.

As a result, I returned to the Revenue Commissioners. They assure me that in regard to the income levy, there is no liability on deposit interest.

However, when it comes to the health levy, and indeed PRSI, savers may face a liability unless the interest comes from a special savings account or a special term account.

An anomaly here, of course, is that many PAYE taxpayers who do not file tax returns will not be paying the PRSI or health levy, whereas those obliged to file will take the hit.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irishtimes.com.

This column is a reader service and is not intended to replace professional advice.