Chapter 9 Special Savings Incentive Accounts
This version: 13 May 2002

The last day for opening an SSIA was 30 April. If you did not open one, this chapter is not relevant to you.

If you are one of the vast majority of people who doesn't read a book in the order it was written, here is a summary of the key points already made. You will have to read the earlier chapters if you want to understand these points more fully.

It's important to make the maximum contribution, so stop contributing to a pension scheme if you can do so without penalty.
If you already have a mortgage, contributing to an SSIA is better than increasing your mortgage repayments. If you have increased your monthly mortgage repayments, go back to your original scheduled payments, and contribute to an SSIA instead.

DEPOSIT ACCOUNTS OR EQUITIES?

It is reported that 80% of savers are opting for deposit versions of the Special Savings Incentive Accounts in favour of equity based products. This is a very big mistake.

The stockmarket outperforms deposit accounts by about 5% a year on average. If you go for the recommended Quinn Life scheme which has the lowest charges, this will reduce the expected outperformance to 4%. If you go for a scheme with huge charges, it will make the SSIA unattractive.

If Quinn Life outperform the deposit account by 4% a year as expected, a person saving €250 a month for 5 years would earn an extra return of €1500 or €1200 after the exit tax.

The 4% is an average outperformance. There is a risk, that the fund might do worse than a deposit account. But this is easily balanced by the fact that it might outperform.

Some people are opting for deposits because of the current state of the stockmarket. Because international stockmarkets have been volatile recently and because sections of the market such as the technology sector have bombed, it is argued that the stockmarket is currently too risky. It is impossible to forecast the stockmarket and there is no point in even trying. This is dealt with in more detail in Chapter 4.

Another risk reducing factor is the fact that you are more or less committing yourself to a regular savings over 60 months. A contributor to a Special Savings Incentive Account will be making 60 separate investments and so will benefit from a diversification of his savings over time. A stockmarket decline in the near future will only have a small effect on the saver's investment as they can only contribute a maximum of €250 per month. And such a decline will reduce the cost at which the investor buys units with subsequent monthly installments.

Even if there is a stockmarket crash, how badly off will you be ? It is very, very unlikely that you will lose money as the Government is providing a 25% subsidy. If you are very unlucky, you might not do as well as your friend in a deposit account, but there would have to be an extraordinary crash for you to get back less than your original contribution.

And what about our old enemy inflation ? Because the SSIA deposit rates are less than the rate of inflation, a deposit based SSIA is virtually guaranteed to decline in value over the next 5 years. This will be hidden by the 25% government top up and so most people will not notice.

Why we recommend the Quinn Life Fund

The most important factor in choosing an investment fund is the level of charges. Ignore the past investment performance. It's just irrelevant.

A lot of the criticism of stockmarket based funds is based on the traditional funds which had huge set up costs and ongoing annual charges. Some funds charged up to 90% of your first year's contributions in set up charges. It would take at least 20 years for such funds to become good value. Most of these exorbitant funds are now gone. They have been replaced by cheaper funds - cheaper but still dear. A typical fund these days charges a 5% entry charge and a 1.5% annual management charge. A lot of the earlier analysis which concluded that deposits were more attractive than equity funds was based on this charging structure.

But there are a number of low charging funds around. Quinn Life is the lowest charging - 1% annual management fee and nothing else. No initial charges, exit charges or set-up charges.

If for some reason you don't want to go with Quinn Life, the next best value is the EBS Summit Funds which charge 1.5% a year.

But check out www.askaboutmoney.com to stay up to date on the best value.

The Best Deposit based SSIAs

If you are still not convinced about investing in an equity based SSIA, you should look around for the best interest rate. At the time of writing the most attractive fund is the ACC Bank which guarantees to match the ECB rate. (European Central Bank) Northern Rock also guarantees this, but only if you save €254 per month. And given that you can walk into an ACC branch, it is altogether a better product.

Fixed or variable ? This is impossible to call. If rates go down, you will be better off with a fixed rate. If rates rise, you will be kicking yourself. Overall, you are better off in a variable rate, so that if your plans change, you will not be penalized for breaking the fixed rate.

Frequently Asked Questions about Special Savings Investment Accounts

This is a compilation of the questions which have been asked most frequently on the Askaboutmoney. If your question isn't answered here, log on to www.askaboutmoney.com and ask it .

The declaration which you must sign when you take out an SSIA answers a lot of the frequently asked questions:

I do not have another SSIA.
I am the person who will beneficial own the qualifying assets to be held in this account.
I am resident in the State.
I will subscribe to the account from funds available to me(or my spouse)from my own resources without recourse to borrowing or the deferral of payment(whether in respect of capital or interest)of sums already borrowed.
I will not assign or pledge assets to be held in the account as security for a loan.

Can I borrow to invest in an SSIA?
No - See above declaration

Can I reduce my mortgage payments to free up money to invest in an SSIA?
No - See above declaration.

Can I increase or decrease my initial contribution?
Yes. In the first year, you must contribute between €12.50 and €254 per month. You can increase or decrease your contribution during the first year, as long as it stays within these limits. After the first year, you can vary your contributions between 0 and €254.

Can I stop my contributions?
Yes. After the first year, you can stop contributing. And if you wish to resume later, you can do so.

Can I cash in my SSIA before the fifth anniversary?
Yes , but you will pay tax at 23% on the entire value including your contribution and the Government's contribution. This amounts to a 4% penalty. €100 + 25% = €125. €125 - 23% = €96.

What happens if I die?
Your estate receives the SSIA less the 23% exit tax on the profits.

What happens on the fifth anniversary?
You must sign another declaration saying that you have complied with the rules and in particular, that you were resident in Ireland during the period. The profits will be taxed at 23% whether you cash it or not. You will be allowed to continue keeping the net amount invested.

If I start with AIB, can I switch to Bank of Ireland?
Yes. The Revenue says that this is subject to certain conditions, but it doesn't specify what they are, so they shouldn't be onerous. Be careful about incurring entry charges from Bank of Ireland. There should be no exit charges from any of the providers.

What happens if I leave Ireland after I take out the SSIA?
You need to be resident to open an SSIA. If you leave within 2 years of opening it, you lose the tax benefits. (This is a simplified explanation of something very complicated see www.askaboutmoney.com for further discussion. )

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