NTMA Cuts State Savings Rates Again (8 December 2013)

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FIXED RATE PRODUCTS

3-year Savings Bond (Issue 15) offering a 4% fixed-rate total return (AER1 1.32%)
4-year National Solidarity Bond2 (Issue 4) offering an 6% fixed-rate total return (AER 1.47%)
5½ -year Savings Certificate (Issue 20) offering an 10% fixed-rate total return (AER 1.75%)
6-year Instalment Savings (Issue 12) offering a 10% fixed-rate total return (AER 1.75%3)
10-year National Solidarity Bond2 (Issue 4) offering a 30% fixed-rate total return (AER 2.66%)
Note 1: AER is the Annual Equivalent Rate. The AER quoted assumes no early encashment.
Note 2: National Solidarity Bond Issue 4 no longer pays annual interest of 1% (unlike Issue 1,2 & 3).
Under Issue 4 the bonus is paid on maturity after 4 or 10 years (same payment structure as the 3-year Savings Bond).
Note 3: The AER on Instalment Savings assumes an average term of 5½ years (12 equal monthly lodgements followed by a 5-year term).

The existing issues of these products are now closed to new purchases.

The rate reductions will only affect new purchases that take place from today (Sunday 8 December 2013). They have no effect on the existing holders of Savings Bonds, Savings Certificates, Instalment Savings or National Solidarity Bonds, as those interest rates have already been fixed for the duration of their term.

Any money already placed in previous issues of these products prior to 8 December 2013 will continue to receive, for their remaining term, the fixed rates applicable to each product on the day that it was purchased.

VARIABLE RATE PRODUCTS

The rate used to calculate the monthly Prize Bond prize fund in January 2014 (and until further notice) will be 1.60%.The top prize structure is unchanged and there will continue to be a €1 million prize in the last weekly draw of each second month, viz. February, April, June, August, October and December. The number of weekly €100 prizes is being reduced from 500 to 250 prizes commencing January 2014. Based on the current number of Prize Bonds, the new 1.60% rate will generate almost 8,500 weekly €50 prizes.

There are no changes to the variable rate on the Ordinary Deposit Account which continues to pay a rate of 0.25% subject to DIRT or to the 30 day notice Deposit Account Plus which continues to pay a rate of 0.50% subject to DIRT.

Speaking today an NTMA spokesman said: “The new rates reflect the reductions in interest rates in the savings market and in Sovereign bond yields generally.”

Link to NTMA State Savings brochures

Editor’s Note:

At any time, the NTMA may amend the fixed or variable interest rates and the number and value of Prize Bond prizes. Prior to the introduction of any such changes, a notice is placed in the national newspapers and full details are available on www.StateSavings.ie. All State Savings™ money is placed directly with the Government and the repayment is a direct unconditional obligation of the Government.
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"Please Note: Some of the features of Issue 4 of the
National Solidarity Bond are different to Issues 1, 2 and
3. In particular, unlike those earlier issues, there are no
annual payments of interest to the bond holder under
Issue 4. A bonus payment is only paid to the holder upon
maturity (or early encashment) of the bond."

CiaranT - Any view on this change to the 4 and 10 year bond?
 
A few thoughts:
  • This round of cuts was first rumoured here on 18 October 2013 and reported subsequently in the Independent.
  • There is no change to the 3 year rate. KBC still offer the highest 3 year rate. However, there are new T&C's.
  • The 5 year term is gone. The term is now 5 years 6 months.
  • Despite the rate cuts, when using comparable grossed up rates, the NTMA still offer the highest 4 year and 5 year 6 month rates (when compared to 5 year rates).
  • The annual payment of interest, which was subject to DIRT, is gone with the 4 year and 10 year rate. This was probably to simplify the offering and make the product what now appears to be fully DIRT exempt.
  • Prize bonds have become even more unattractive.
  • Now even more difficult to justify having your money in such long NTMA terms and such low rates.
 
Just looking at the 10 year SB in more detail and comparing it to issue 3. Does An Post and the NTMA put brochures for older issues on their websites? I had a very quick look but couldn't find them. Obviously the terms and conditions will be stated in legislation and can probably be found on irishstatutebook.ie but still, it's handy to have a brochure.

I have saved some of the old brochures in any case.

10 year SB issue 3:

1% interest each year for 10 years. Gross, not reinvested, subject to DIRT.

Cumulative bonus after year 4 - 0%
Cumulative bonus after year 5 - 6%
Cumulative bonus after year 7 - 13%
Cumulative bonus after year 10 - 25%

Pre Budget the AER for the full term was 2.79%
Post Budget, assuming DIRT/PRSI of 41% on the interest only I calculate AER for the full term as 2.73%
Post Budget, assuming DIRT/PRSI of 45% on the interest only I calculate AER for the full term as 2.70%

10 year SB issue 4 -the new one introduced today - the structure seems more like savings certs and bonds:

No yearly interest.

Cumulative bonus after year 1 0.15%
Cumulative bonus after year 2 0.50%
Cumulative bonus after year 3 1.00%
Cumulative bonus after year 4 3.00%
Cumulative bonus after year 5 6.00%
Cumulative bonus after year 6 8.00%
Cumulative bonus after year 7 12.00%
Cumulative bonus after year 8 18.00%
Cumulative bonus after year 9 24.00%
Cumulative bonus after year 10 30.00%

Assuming no DIRT or PRSI, AER for the full term is 2.66%

So, 2.73 or 2.70% for issue 3 post Budget vs 2.66% for the new issue, not a massive change.

And if you were to encash after, say year 4 the new issue seems better, 3% tax free bonus compared to 0% bonus and 4% interest minus DIRT/PRSI. I haven't looked closely at the other years.

Also there seem to be a change in the terms if you encash between anniversary dates although it is not phrased very clearly to me. From the state savings website:
Repayments made before the first anniversary date will receive a bonus payment based on Principal being repaid at the rate of 0.15% based on the number of days on deposit (excluding date of repayment)

Repayments made between anniversary dates will received a bonus payment at the rate of 0.15% based on the number of days on deposit on the total of the repayment (Principal + Bonus) value at the last anniversary date. (excluding date of repayment)
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So if I encash 100 days after an anniversary date do I get a bonus of 100/365 *0.15% on the principal + bonus as well as the bonus itself accrued up to the anniversary date?
 
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