Little interest leaves savers short of incentive

The success of the Government's Special Savings Incentive Accounts (SSIAs) could be interpreted as proof that Irish people - or at least more than 1.1 million of them - love saving.

On the other hand, it could merely be evidence that Irish people won't turn their noses up at "free money" - in the form of the Government's €1 for every €4 bonus - when it is shoved in their faces. The simple financial wisdom of putting cents aside and watching them grow magically into euro, instilled since the piggy bank days of childhood, was not necessarily what pushed people into signing up.

Outside the realm of SSIAs, the incentives offered to potential savers are a lot less compelling especially when compared against current inflation of 2.3%.

The best interest rate available on demand is 3.05 per cent before Dirt from British bank Northern Rock, and only if you have a lump sum of €1,000 to open the account online at www.northernrock-ireland.ie.

For a minimum deposit of just €1, new market entrant Rabobank Direct offers a slightly lower rate of 3 per cent. Details of how to open an account with this Dutch-based bank are available at www.rabodirect.ie. But while both institutions have reported a boom in trade that is expected to pick up further once SSIAs start to mature, for many consumers the interest rates offered won't be high enough to overcome the inertia that stops them from filling out an online application form and posting the necessary identification.

Enter AIB, which since August has been offering an online personal savings account with a current rate of 3 per cent. The instant-access account, which is open to customers putting aside between €20 and €1,000 a month, is proving popular with the bank's online customers.

According to Hugh O'Keeffe, savings and investment manager for AIB, customers with an internet banking account can open a savings account within 90 seconds. They are now doing so at a rate of more than 150 per day.

AIB is also offering interest bonuses to customers who make at least one lodgment per quarter and make no more than one withdrawal each year. These start at 10 per cent of the interest earned during the year, meaning it is potentially the highest paying account available on demand.

The convenience of the account for AIB customers who want to keep up the savings habit makes it a likely home for their maturing SSIAs in 2006 and 2007 - or at least the balance of their SSIA funds once they have indulged in a long-awaited spending spree.

"There's no doubt that the proportion of people contributing the maximum to SSIAs is increasing and it does point to a very strong savings culture," says O'Keeffe, who believes the AIB account is designed to cater for the small rather than the large saver.

Although further competition in the market is likely as SSIA maturity dates approach, rates in and around 3 per cent suggest that consumers will largely have to rely on their own savings discipline for their rainy day funds to grow.

The interest paid on their deposits will scarcely make much difference - unless, that is, they are prepared to tie their money up for longer in higher risk investment funds. By contrast, however, Bank of Ireland Life's promotional campaign for its new Guaranteed Evergreen Fund is boasting past performance in its original, non-guaranteed Evergreen Fund of 7.8 per cent per annum (gross) over the past six years - a total gross return of 56.1 per cent over that period.

Savers should never count on the past performance of a particular investment product being repeated. Nevertheless, for long-term savers with a minimum of €5,000, there is little doubt that they should be able to earn a higher return on their money than a mere 3 per cent.

For these savers, however, it will be important to keep a separate accessible stash of cash aside in simple demand deposit accounts for emergencies. (John Lowe's book The Money Doctor recommends that a single person without any responsibilities should put aside enough cash to cover three months' worth of expenditure, while a couple with children, a mortgage and a car should build up savings equivalent to six months' expenditure.)

The new Guaranteed Evergreen Fund provides a capital guarantee only after six years. If savers need to cash out before then, the value of their fund could be lower than the sum they put in and they would crystallise their loss.

Even if savers wait until after six years to withdraw their money, there is no guarantee they will receive any return on their capital. Allowing for inflation, the real value of their money will have decreased.

But this "inflation risk" applies to the ostensibly safer lower interest deposit accounts too. If the interest rates don't beat inflation rates, savers lose out.