Interest rates have shot up over the last couple of years as Central Banks struggle to get inflation under control. At time of writing, the ECB are expected to increase rates further today.
While this is bad news for mortgage holders, increased rates is supposed to be good news for deposit holders. Except Irish banks are slow to pass on these increased rates to deposit holders. They are awash with cash and don’t need to offer higher rates to attract more deposits. The National Treasury Management Agency (NTMA), the organisation that runs State Savings/ Post Office savings may have forced their hand by increasing the rates that they offer.
From 1 October 2023, the following new rates will be offered:
3-Year Savings Bond from 1.0% to 4.0% (AER from 0.33% to 1.32%)
5-Year Savings Certificate from 5.0% to 9.0% (AER from 0.98% to 1.74%)
6-Year Instalment Savings from 5.5% to 10% (AER from 0.98% to 1.75%*)
10-Year National Solidarity Bond from 16% to 22% (AER from 1.50% to 2.01%)
The interest earned on these products are tax free too. You can access your money at any time during the term, which makes them an attractive option for cash holdings. You never know when you need to access cash and you don’t want your money locked in a for a fixed term.
The new rates only apply to products taken out from 1 October 2023. If you took out a product before then, you get the old rate and it will not convert to the new one.
Should you cash in your existing plan and open a new one with the better rate? That depends on how long your existing one is in place. While you can access your money at any time under State Savings plans, the interest you earn over the truncated period is reduced on a tiered basis. The table below shows the interest you earn under the existing 5 year savings certificate (new terms and conditions aren’t out yet).
As you can see, the interest rates are back loaded, so the first few years earn little or not interest. Say you cash in after 2 years and get €1,005 and start over again. You have now extended your investment term from 5 years to 7 years (the two already done plus the new 5). Your €1,005 at the maturity of the new bonds will be €1,095.45. That equates to an AER of 1.32%. Or you could let it run to term and then start a new product. With the extended 10 year term, you will get €1,144.5 at the end, which is an AER of 1.36%. You have to decide which is worth it.
Steven Barrett
18 September 2023