It is not beyond possible that the NTMA will adjust State Savings rates downwards
The interest rates and terms and conditions for State Savings products are in various Statutory Instruments eg for savings certsIf i take out a state savings product for 3 or 5 years tomorrow, will i get the current rate on maturity even if rates are adjusted downwards in the future?
Similarly can DIRT be introduced retrospectively to these products at (budget) anytime?
Yes and no.
For short to medium term deposits, under 3 years, banks offer better rates (e.g. Ulster @ 3.83%).
For lump sum variable rate products, banks (KBC @ 3.25%) marginally offer higher rates than State Savings (30 day notice @ 3.00%). If rates continue to plunge, then State Savings may eventually lead the variable rate pack.
State Savings destroy the banks when it comes to long dated term deposit products. There is no rate competition from the banks.
It is not beyond possible that the NTMA will adjust State Savings rates downwards, but given the national deficit refinancing needs, over the coming years, State Savings rates may stay static.
Ciaran T I am looking at moving money from an account I have that I don't need for a couple of years - how long is long term with Stage Savings scheme
Re: state savings vs Ulster Bank shorter term deposits, here is a compound interest calculator that is useful for predicting what you might earn from a 1 year fixed term deposit if you reinvest it for 2, 3, 4 etc years. That's assuming rates and DIRT stay the same - which are pretty big assumptions.
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Let's say you have 10,000 to invest. UB's 1 year account pays 3.75% gross. If you open this account and after 1 year reinvest at the same rate and same DIRT for another year, after year 2 you'll have 10,532.92
If you buy a State Savings bond with your 10,000 and encash it early after year 2 you'll have 10,520. Slightly less than the UB but it is guaranteed unlike the UB return which is subject to the assumptions I described above.
Obviously you lose the interest for year 3 but you get the interest for years 1 and 2 provided you wait until the anniversary date. If you encash before the anniversary date you lose a year's interest. Eg if you encash after 1 year and 364 days you lose all the interest for year 2.If you withdraw after yr2 with an post - do you loose all interest?
Before the maturity date, they will write to you and enclose a form. If you want to reinvest you tick some boxes on the form and send it back to them (freepost) with your bond enclosed. You can also choose full or partial repayment or can choose a different State Savings product on the form.I have a Bond that is due to mature shortly. What happens if I do nothing i.e. will it be re-invested in another Bond if I don't want to take out the money? Or will I have to cash it and purchase another?
I'm not suggesting that anyone buys Irish government bonds either by the way just making the point that an equivalent rate of interest to reflect the default risk would be more like 6% rather than the 3% on offer.
As for the alternative to assisting the State it's obviously the free market. As a believer in free market economics I for one would much prefer investors to allocate their savings to the capital markets rather than shore up the State's finances since it is a more efficient and productive use of their capital.
Any views on how/if these state savings products could be impacted in such an event?
Obviously you lose the interest for year 3 but you get the interest for years 1 and 2 provided you wait until the anniversary date. If you encash before the anniversary date you lose a year's interest. Eg if you encash after 1 year and 364 days you lose all the interest for year 2.
With savings cerst there is an anniversary date every 6 months whereas with bonds it's every year.