herald

Sunday 19 August 2018

Beware the catch if you invest nest-egg in a solidarity bond

I have €5,000 saved for my two children (they are aged seven and three). This is money they have been given over the years as gifts, plus money my husband and I have regularly added and would like to continue to do so.

We do not plan on using any of this money until they are ready for college. Where is the best place to invest it? I was thinking of the National Solidarity Bond but I am not sure.

Vanessa

The Government launched the national solidarity bond, which is aimed at long-term savers, with much fanfare last April. The national solidarity bond pays 1pc interest every year, plus a 40pc bonus if it is held for the full ten-year term. That works out at the equivalent of an annual interest rate of 4.14pc.

But there's a catch. Not alone is the full 40pc bonus not paid until the bond has been held for ten years, the annual 1pc interest payment is subject to Deposit Interest Retention Tax (DIRT) at 27pc. This reduces the after-tax interest rate on the national solidarity bond to just 3.87pc.

This combination of the fact that the 1pc annual interest payment is subject to DIRT and the fact that the full 40pc bonus isn't payable for ten years makes the national solidarity bond relatively unattractive.



Flexibility

By comparison, savings certificates pay a 3.5pc interest rate after just 5.5 years while savings bonds pay 3.23pc over just three years. Unlike the national solidarity bonds, the interest paid on savings certificates and bonds is DIRT-free.

In addition, the vast bulk of the interest on savings bonds and certificates is paid annually so you don't have to wait for ten years to get your money. This gives savers a much greater degree of flexibility than is the case with the national solidarity bond.

If, for some reason, you do have to cash in a national solidarity bond early you will have to wait at least five years to receive even part of the bonus, and even then savers will receive a bonus of just 10pc. Even if the bond is held for nine years the bonus is still only 22pc. In other words, unlike savings bonds or certificates where the vast bulk of the interest is paid out every year with only a small bonus element payable at maturity, you have to hang on to the very end to get the national solidarity bond bonus.

If Vanessa can be absolutely certain that she won't have to withdraw her children's money at any time over the next ten years then, by all means, she should put it into the national solidarity bond. Otherwise she and her children would be better off putting it into either savings bonds or certificates.

I am a VHI subscriber on Plan B Options. There is no way that I can afford the recently-announced 45pc increase in the price of this plan. What should I do? Should I trade down to a cheaper VHI plan or should I switch to either Quinn or Aviva?

Michael

Michael needs to get a move on. The first thing he should do is contact the VHI and renew his health insurance policy immediately. He can do this regardless of his current renewal date. By doing so he will beat the VHI price increase which comes into effect on February 1 and lock in the current price of his health insurance plan for the next 12 months.

That buys Michael the time to research all of the options available to him. He should go on to the Health Insurance Authority's website, www.hia.ie, which contains detailed information on all of the plans available from the three health insurance providers and do some serious homework before making any final decision.

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