Improving rates for those seeking safe options

Most people who took out Special Savings Incentive Accounts (SSIAs) between May 2001 to the end of April 2002 opted for "safe" deposit SSIAs rather than "risky" investment SSIAs linked to the stock market.

For both types of SSIA, the 25 per cent Government bonus - or €1 for every €4 saved - was by far the main attraction.

On deposit SSIAs, the additional return was at best a fixed interest rate of 4 per cent. On equity SSIAs, stock market losses over the early period of investment meant that returns were negative in the first couple of years, in some cases wiping out almost all of the benefit of the Government bonus.

But with markets recovering since 2003, the performance of most equity SSIAs has pulled ahead of the deposit variety - the latest figures from Bank of Ireland show that customers who signed up to its growth fund through their SSIA are on course to receive a 15-20 per cent higher return than those who stuck to deposits.

Despite this, there are very good reasons to believe that people who played it safe with SSIAs will continue to do so once their accounts mature and they are looking for a new haven for their spare cash.

Financial institutions are hoping, indeed counting on, SSIA holders seeking a replacement savings account into which they can divert the money that they were putting into their SSIA.

Once the five years of their account is up - sometime between May 31st this year and April 30th next year - around 1.1 million consumers will have up to €254 extra in their wallets.

"SSIAs have created a culture of saving in Ireland, which our research suggests will continue long past the maturity of these accounts," says Hugh O'Keeffe, head of resources, strategy and products at AIB.

Humble deposit accounts may not produce the most exciting returns in the world - in fact, they may not even keep up with inflation - but they are less volatile than investment-linked products and, unlike those products, they do not have fees, charges or high exit penalties.

In general, they are also more flexible than investment policies, with easier access to the money should savers need to withdraw their savings - even if some savings providers limit the number of withdrawals that can be made without forfeiting some of the interest due.

Thanks to a combination of increased competition in the market and increases in the base European Central Bank (ECB) interest rate, interest rates on regular savings and deposit accounts are rising. The highest interest rate available on risk-free savings is 5 per cent from AIB, which is available on regular savings of between €10 and €300 a month. This account, which was launched last month, facilitates anyone who wants to continue saving the same amount that they were putting into their SSIA.

The interest on the account will stay at a margin of two and a half percentage points over the ECB key rate of interest, which is currently 2.5 per cent, until January 2008, at which point it will revert to the ECB rate itself, with no margin.

The next highest interest rate is available from Anglo Irish Bank, which is offering 4.5 per cent per annum for two years in its new regular saver account. This account is open to customers willing to save €100-€1,000 a month.

AIB customers who want to save €1,000 a month would have to opt for its online savings plan, which boasts an interest rate of 3.5 per cent with bonus interest to customers who limit their withdrawals.

At Anglo, there are no penalties for missing monthly contributions over the fixed two-year term and the level of contribution can be varied at any time.

Bank of Scotland (Ireland), which offers a monthly saving account with a rate of 4 per cent, is less flexible. The amount saved each month can only be changed once a year and, if more than two withdrawals are made in a year or the monthly payments cease, the interest rate will revert to just 2 per cent.

This account is open to anyone wishing to put aside between €10 and €750 every month. However, up to €10,000 can be invested upfront and a maximum of €50,000 can go into the account, making it a suitable home for a lump sum as well.

Dutch online bank RaboDirect offers interest of 3.35 per cent on a deposit/regular savings account operated through RaboDirect.ie. While this rate falls short of that offered by its competitors, RaboDirect's general manager Greg McAweeney points to the lack of restrictions on the account, which has a minimum deposit of €1 and lets customers add or withdraw cash at any time without penalty.

Anglo Irish Bank, Bank of Scotland (Ireland) and RaboDirect will all have to work harder to capture post-SSIA business, as none are SSIA providers.

The Irish Financial Services Regulatory Authority is sending out application forms for new savings and investment products alongside the Revenue Commissioners' declaration form, the SSIA 4, which SSIA holders must sign before their accounts mature in order to receive the Government bonus.

However the regulator has said consumers can simply take their money and sever their ties with their SSIA provider, and either shop around or just go shopping.