State Savings (NTMA) bonds and certs looking good

T

The Ghoul

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With the increase in DIRT and the ECB lowering interest rates, who thinks that now is a good time to fill one's boots with State Savings fixed term deposits of 3 years (bonds) and 5.5 years (certs)

An individual is allowed to buy 120k in bonds and 120k in certs. If you have your 240k and it grows to say, 276k when your bonds and certs mature, the 276k can be reinvested i.e. the limits do not apply when reinvesting, at least for the first reinvestment. Can anyone confirm this?

As these products are DIRT exempt they became more attractive when the DIRT rate was raised to 30% in Budget 2012. If the DIRT rate is raised again in forthcoming budgets - could happen - they'll look better again.

These products are not the National Solidarity Bond, DIRT is payable on it.

If bank deposit interest rates start to come down thanks to the ECB it could be good to be "locked in" for 3 or 5.5 years. Yet if the depositer wants to withdraw his money it's not really locked in - it can be gotten at any time with 7 days notice. The penalty for early encashment is related to the fact that interest is accrued every 6 months for a cert or every year for a bond rather than daily. So if someone buys a bond and cashes it in, say, 364 days later, he gets no interest.
 
The Ghoul said:
With the increase in DIRT and the ECB lowering interest rates, who thinks that now is a good time to fill one's boots with State Savings fixed term deposits of 3 years (bonds) and 5.5 years (certs)

An individual is allowed to buy 120k in bonds and 120k in certs. If you have your 240k and it grows to say, 276k when your bonds and certs mature, the 276k can be reinvested i.e. the limits do not apply when reinvesting, at least for the first reinvestment. Can anyone confirm this?

As these products are DIRT exempt they became more attractive when the DIRT rate was raised to 30% in Budget 2012. If the DIRT rate is raised again in forthcoming budgets - could happen - they'll look better again.

These products are not the National Solidarity Bond, DIRT is payable on it.

If bank deposit interest rates start to come down thanks to the ECB it could be good to be "locked in" for 3 or 5.5 years. Yet if the depositer wants to withdraw his money it's not really locked in - it can be gotten at any time with 7 days notice. The penalty for early encashment is related to the fact that interest is accrued every 6 months for a cert or every year for a bond rather than daily. So if someone buys a bond and cashes it in, say, 364 days later, he gets no interest.
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Thinking along similar lines. €120k over 3 years in state savings @10% = 12000 tax free. similar deposit at 3.25% returns about €8377 net, difference of €3622. Other factors would include access and aloss of interest if you break state savings etc, security of state guarantee.
 
Hi Ghoul

What's your view on the security of these savings versus bank deposits (€100k) and other instruments like German Bonds?
 
Maybe Ciaran could update his best buys thread to take account of the DIRT changes. By my calculations:

3 year Savings bond 3.23% AER "net"
To get this rate from a bank account, the account would need to pay 4.61% (up from 4.42% before the DIRT increase) AER gross

5.5 year Savings cert 3.53% AER "net"
To get this rate from a bank account, the account would need to pay 5.04% (up from 4.84% before the DIRT increase) AER gross.

Therefore 4.61% and 5.04% are the rates which should be used when comparing these products with bank deposit accounts.

BTW pensioners below a certain income threshold are exempt from paying DIRT so they should ignore the above.
 
CiaranT's updated best buys have different rates to the ones I calculated. Eg Ciaran's post has the "grossed up" AER for the savings cert going from 4.84 to 5.27%. I think the new figure should be 5.04%.

I got this by dividing 3.53 by (1-0.30) where 0.3 is the new DIRT rate. Previously it would have been 3.53 divided by (1-0.27)

Who is right?

Edit: I think Ciaran is using a new DIRT of 33% does this rate not only apply to savings which are truly "locked in" for more than 1 year?
 
Sorry for the delay in updating the 2012 DIRT rates in the best buys, I was waiting for the resident expert of State Savings products to help me.

BlackRock, has kindly provided the below information with regard to how to calculate the "grossed up" AER rates. Specifically, the rates have been taken from the bold figures in table 4A below.

Please see below BlackRock's explanation as to why the 33% rate should be used. I will add a note to the best buys.

Black Rock said:
State Savings - Budget 2012 - Grossed Up Rates

The NTMA has published revised interest rates resulting from the DIRT increase from 27% to 30% in Budget 2012. If you go to
http://www.ntma.ie/PersonalSavings/personalSavingsIntro.php
and then to the bottom of the page there are two pdf files.
· A Guide to NTMA State Savings™
· State Savings - interest rates January 2012

Using the after tax tables (2 and 4) in the second pdf at http://www.ntma.ie/Publications/2011/State_Savings_interest_rates_January2012.pdf to gross up the net rates, to enable comparison with with the gross rates paid on products offered by financial institutions, apply the new Budget 2012 DIRT rates as follows
· 30% where interest is paid annually or more frequently
and
· 33% where interest is paid less frequently than annually.

To “Gross Up” the net after tax rate must be divided by 70 and multiplied by 100 (if applicable DIRT is at 30%) and divided by 67 and multiplied by 100 (if applicable DIRT is at 33%)

In respect of both the 4 and 10 year National Solidarity Bond interest is paid annually so use the 30% rate.

In respect of Savings Bonds and Savings Certificates where interest is paid at end of year 1 use the 30% rate.
However, these two products do not normally pay annual interest as all interest is paid on encashment. Therefore where encashment takes place in year 2 or longer use the 33% rate.

Using these rules produces two tables –

Table 3a shows the “Grossed Up” Total Return
Table 4a shows the “Grossed Up” AER


Table 3A – Total Return“Grossed Up Rate”

End .......10 Year......5 ½ Year.....4 Year........3 Year
Year.......National.....Savings.......National.......Savings
.............Solidarity....Certificate...Solidarity.....Bond
END.......Bond...........................Bond
YEAR__________________________________
1.......... 1.00%........3.00%........1.00%........3.14%
2.......... 2.00%.......6.87%.........2.00%........7.76%
3.......... 3.00%.......11.94%.......3.00%.......14.93%
4.......... 4.00%.......18.21%......19.71%
5..........19.29%......26.12%
5½....... 0.00%........31.34%
6.......... 20.29%
7..........38.43%
8..........39.43%
9..........40.43%
10........67.14%
Click to expand...

Table 4A - AER (Annual Equivalent Rate) “Grossed Up Rate”

End .......10 Year......5 ½ Year.....4 Year........3 Year
Year.......National.....Savings.......National.... ...Savings
.............Solidarity....Certificate...Solidarit y.....Bond
END.......Bond...........................Bond
YEAR__________________________________
1.......... 1.00%........3.00%........1.00%........3.14%
2.......... 1.00%........3.39%........1.00%........3.84%
3.......... 1.00%........3.88%........1.00%........4.82%
4.......... 1.00%........4.36%........4.70%
5.......... 3.67%........4.90%
5½....... 0.00%........5.27%
6.......... 3.20%
7.......... 4.94%
8.......... 4.41%
9.......... 4.01%
10........ 5.61%
Click to expand...
The above methodology was used to calculate the grossed up AER rates. Does this clear things up?
 
The Ghoul said:
CiaranT's updated best buys have different rates to the ones I calculated. Eg Ciaran's post has the "grossed up" AER for the savings cert going from 4.84 to 5.27%. I think the new figure should be 5.04%.

I got this by dividing 3.53 by (1-0.30) where 0.3 is the new DIRT rate. Previously it would have been 3.53 divided by (1-0.27)

Who is right?

Edit: I think Ciaran is using a new DIRT of 33% does this rate not only apply to savings which are truly "locked in" for more than 1 year?
Click to expand...

I did my own calcs and i think 5.04% is right assuming dirt is 30% for each of next 5.5 years
 
Mtk - Did you read my post above!? The applicable comparable DIRT rate is 33% and not 30%

In respect of both the 4 and 10 year National Solidarity Bond interest is paid annually so use the 30% rate.

In respect of Savings Bonds and Savings Certificates where interest is paid at end of year 1 use the 30% rate.
However, these two products do not normally pay annual interest as all interest is paid on encashment. Therefore where encashment takes place in year 2 or longer use the 33% DIRT rate.
 
I bit the bullet just before Christmas and put some savings into a 4 year national solidarity bond. I just got fed up with paying DIRT and the return is acceptable to me. It was hassle-free opening it up too.
 
STEINER said:
I bit the bullet just before Christmas and put some savings into a 4 year national solidarity bond. I just got fed up with paying DIRT and the return is acceptable to me. It was hassle-free opening it up too.
Click to expand...

Did The Ghoul not say above that the National Soldarity Bond was not Dirt exempt?
 
Thanks Ciaran (and Black Rock) for the clarification. I suppose this hinges on exactly when and how interest is accrued and paid. IIRC the NTMA don't send out statements for the bonds and certs after each accrual period stating the current value if encashed. If they did do this would the lower DIRT be the one to use for the "grossed up" calculation?

I also presume that the lower DIRT rate is applicable for most/all multi year fixed term deposit bank accounts.

I think we need to be careful to compare like with like here in the best buys thread. Someone comparing, say, a 3 year term deposit with an NTMA savings bond needs to be aware that the grossed up rate for the bond includes DIRT at 33% whereas the gross rate for the bank term deposit includes DIRT at 30%. I am a fan of the State Savings products but I wouldn't like someone to think that they are better than they are.
Did The Ghoul not say above that the National Soldarity Bond was not Dirt exempt?
Click to expand...
It's not fully DIRT exempt but the "bonus" is DIRT exempt.

Eg for the 4 year solidarity bond

Gross return of 15% over 4 years on your investment (Gross AER 3.56%)

Comprises 4 annual interest payments of 1%, subject to the prevailing DIRT rate, plus a tax free maturity bonus of 11% after 4 years (Net return 13.92%, net AER 3.31%)

4 year term

Fixed rate of return

Maturity Bonus of 11% (Tax Free to Irish Residents)
Click to expand...
 
The Ghoul - Thanks for your comments. I see where you are coming from.

This NTMA guide here gives a good guide to what lower rate of interest you get if encashment takes place early.

The Ghoul said:
I also presume that the lower DIRT rate is applicable for most/all multi year fixed term deposit bank accounts.
Click to expand...

Varies. Certainly not all. AIB, for example, only pay on maturity with some of their term deposit products.

However, I take your point that most term deposits pay interest at least annually. Practically, this may skew the comparison. However, technically, the comparable DIRT rate is correct at 33%.

Hmmmm. I guess it all boils down to accuracy and fairness. I can see your argument that 30% might give a more representative comparable view. I can also see the argument that 33% gives an accurate view.

Further comments welcome. I will PM BlackRock as I would like to hear his view on this.
 
These are looking like very attractive saving options now.

Re the 30% v 33% argument, I'd prefer 30% myself as this is the rate most people will be comparing it with.
 
Can someone please calculate for me, based on my current position and rates remaining as they are, my question is-----------1) Exactly what would my cash return be if I invested €100,000 in year 1 with A.I.B. at 4.1%. In year 2 I re-invested 100,000 + interest-dirt @30% and in year 3 did the same again. 2) What would be my cash return if I put the 100000 in government bonds for 3 years.
 
Can someone please calculate for me, based on my current position and rates remaining as they are, my question is-----------1) Exactly what would my cash return be if I invested €100,000 in year 1 with A.I.B. at 4.1%. In year 2 I re-invested 100,000 + interest-dirt @30% and in year 3 did the same again. 2) What would be my cash return if I put the 100000 in government bonds for 3 years.
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AIB: 4.1% gross, 2.87% net
Year 1: 102,870
Year 2: 105,822
Year 3: 108,859

An Post 3 year bond
Year 1: 102,200
Year 2: 105,200
Year 3: 110,000
 
State Savings are not just looking good - they are looking great.

I have two 3 year certs due to mature shortly. My initial investments were €62,107 and €20,770. Reading comments on this forum over the last couple of years made me very jittery and, on more than a few occasions, I almost jumped ship. But I am delighted I held my nerve. For my outlay (and a lot of unnecessary worry) I gained a nice neat pot of interest: €8,287 to be precise.
 
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