Q&A:Your personal finance questions answered

Q I HAVE read many articles in recent years in your Friday business section on savings and investments, and am surprised at how seldom An Post savings are recommended as safe vehicles.

While returns on them are usually poor in good times, their savings certificates now offer on average 3.53 per cent per annum over 5.5 years and are safe and tax free, as they always were.

This is good compared with rates, especially when current lack of security is allowed for.

Mr D.B., Dublin

AIn some ways, I guess, you have answered your own initial point.

You are quite right in your statement that any perusal of the personal finance pages in general, and this column in particular, over recent years would not yield much in the way of encouragement for investing with An Post.

As you point out yourself, An Post products were simply uncompetitive in the savings market in good times and, until the last 18 months or so, we have been living through the longest, uninterrupted “good time” economically since the foundation of the State.

In those circumstances, An Post products were struggling to better inflation never mind offer the returns available on other reasonably low-risk products.

Of course, you are also right to note that we live in changed times and security is now regularly cited as the primary concern of investors.

In this scenario, An Post’s State-guaranteed products are beginning to come back into their own.

As it happens, however, these products are now competing with bank deposits that carry the same State guarantee – at least until the end of September next year – and, as you can see from the other query in today’s column, some people’s faith in the State’s ability to stand over those guarantees is waning.

As you say, savings certificates are currently offering an annual equivalent rate of 3.53 per cent per annum.

However, you are locking yourself into a five-year, six-month savings period if you want to avail of this rate – 21 per cent over the full period.

You can take your money out earlier but, unsurprisingly, the rate will be less attractive – 2.1 per cent at the end of the first year, for instance.

An Post savings bonds, equally, offer about 3.23 per cent annual equivalent rate, but only if you lock in for three years. Rates short of that period are roughly equivalent to the savings certificate rates.

How does this compare?

Well, Anglo Irish Bank is currently offering 3.6 per cent per annum on its demand deposit account for savings up to €100,000.

For those able to lock in their savings for a short period, Permanent TSB’s 100-day account for sums in excess of €10,000 is offering 4 per cent gross.

It is worth bearing in mind that, other than on An Post savings, you will have to pay Deposit Interest Retention Tax (Dirt) which, since April this year, is levied at 25 per cent.

The message seems to be that if you are in a position to lock your money in for a three- or five-year term, An Post does offer the best value.

Just how guaranteed is the State guarantee?

Q I currently have my savings in Anglo Irish Bank. It is well under €60k and I am depending on the Irish Government guarantee to assure me of its safety.

However, recently I am having doubts over this guarantee. The Irish Government credit rating is slipping and the cost of insuring against its default is rising. The Irish State could go bankrupt. Its credit rating now is worse than Lehman Brothers, which did go under.

Is it possible for the Irish Government not to stand over its guarantee and, if so, what is the safest way to save?

I know Rabobank still has an AAA rating but its deposit rates are pitiful.

I could just repay more of the mortgage but, in the context of a Government default, is it better to have access to your money than for it to be stuck in the mortgage?

Mr M.P., e-mail

AI suppose the simplest answer is that, in the event of a sovereign default on debt, there is no place that will be good.

As you can see from the Icelandic example, the budgetary stringency that would be imposed in such a situation would ensure that everyone would feel significant pain.

On a more practical level, while it is true that the Government debt rating has slipped recently, it should be noted that this slippage is from the highest AAA level.

There is absolutely no suggestion in the markets that the Irish Government is anywhere close to default at this point.

Could it happen? Theoretically, yes, of course it could. Practically, I think it is unlikely, not least because the European Central Bank and our European Union partners will go a long way to ensure that no member state defaults in such a fashion.

The damage it would impose on the euro currency and the European Union – the world’s largest trading bloc – as a whole is scarcely worth considering.

Short of a default, is there a prospect of the Government refusing to stand over its guarantee?

I am not aware of any scenario short of default in which the Government can walk away from the absolute guarantee it has given in relation to deposits at AIB, Bank of Ireland, Anglo Irish Bank, Irish Life Permanent, EBS, Irish Nationwide and Postbank until the end of September next year and the longer-term threshold guarantees under the revamped deposit protection scheme.

If you are fearful of the viability of the Government guarantee, there is no point even in looking at the traditionally secure option of An Post, as it is ultimately dependent on a Government guarantee.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@ irishtimes.com. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions.

All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.