Permanent TSB joins institutions who cut rates

MORE that 250,000 Special Savings Incentive Account (SSIA) holders have been hit with cuts in interest earned on millions of euro lodged with Irish financial institutions in recent weeks.

Yesterday, Permanent TSB became the latest institution to cut the rate it pays to its 25,000 holders of variable deposit SSIAs by 0.5%. This follows on similar low profile cuts in rates by AIB Group -0.75%, First Active -0.5% and ACC Bank -0.5%.

Bank of Ireland said it has no plans to cut the 4% rate it has paid to its 200,000 variable account holders since the inception of the SSIA scheme through which the Government pays 1 into SSIA accounts for every 4 saved.

The SSIA scheme introduced by Finance Minister Charlie McCreevy in December 2000 will cost the taxpayer at least €2.5 billion and possible more over the five years of the scheme.

However, savers, who opted for equity-based SSIAs, have generally had a torrid time, according to employee benefit consultants Becketts, who point out managed funds are down on average about 23% in 2002 alone.

"In some cases, the 25% government bonus has been wiped out by the fall in unit prices caused by substantial falls in equity markets worldwide," according to Norman Barry of Beckett personal financial planning division.

Mr Barry says one option savers in equity based SSIAs have is to switch future contributions into a secure fund, like a cash fund, where unit values may be guaranteed not to fall in value or at least are unlikely to fall to any significant extent.

Mr Barry says that by locking into a secure fund for future contributions, savers are then guaranteed a fixed minimum return at the end of the five years, with the benefits of the Government 25% bonus.

"If a saver whose SSIA is going 12 months at this stage switched new contributions into a secure fund, then even if no investment growth is achieved in this secure fund, the impact of the Government 25% bonus would have the effect of providing a guaranteed tax free return of 5.7% per annum on the first subsequent contribution, 5.9% per annum on the next month's contribution.

"As time goes by, a higher guaranteed return is obtained on each fresh contribution paid," he said.

Mr Barry said contributions paid within two years of the end of the five year period would be getting a guaranteed minimum tax free return of over 10% per annum.

"To many savers, these types of guaranteed tax free returns would be very acceptable." he said.