| 19.9°C Dublin

Dan White: Is national solidarity bond the best place to invest my savings?

Dan answers your financial questions

I save €250 per month which I put into the national solidarity bond. I am using this as long-term savings, and do not intend to touch it for 15 to 20 years or even longer.

I have an emergency fund, and short-term savings with Permanent TSB.

Is the NSB a good investment considering how fragile pensions have been in recent years?

Lee

Comparing the national solidarity bond and pension funds is a bit like comparing apples and pears.

Yes, pension fund returns have been desperate with the average Irish-managed pension fund delivering average annual returns of just 0.5pc over the past 10 years.

However, pension premiums qualify for generous tax relief at the person's top marginal tax rate, up to 41pc.

When the tax relief is taken into account, the real returns from pension fund contributions are much higher.

A better yardstick is to compare the NSB with the State's existing medium and long-term savings schemes, savings bonds and savings certificates.

According to the NTMA, which administers the NSB, the bond pays out a total of 47.5pc interest (after DIRT) over 10 years.

That works out at an annual compound after-DIRT interest rate of 3.96pc.

This apparently compares very favourably with the 3.23pc interest rate paid on savings bonds and the 3.53pc from savings bonds (interest paid on savings bonds and certificates has always been free of DIRT).

But there's a catch.

While the vast bulk of the interest due on savings bonds and certificates is paid out immediately, with only a small portion being retained until the final maturity date, three years in the case of savings bonds and five-and-a-half years in the case of savings certificates, the vast bulk of the interest due on the national solidarity bond is back-loaded.

The NSB is supposed to be held for 10 years. During that period the bond will pay a 1pc annual interest rate (which will be subject to DIRT at 25pc leaving an after-tax interest rate of just 0.75pc). Then at the end of the 10-year period the saver receives a 40pc DIRT-free bonus.

The only exceptions to this rule are that you will receive a 10pc bonus if the bond is held for five years and a 22pc bonus if it is held for seven years.

Further complicating matters is the fact that the minimum contribution to the national solidarity bond is €500 and while the NTMA will accept smaller amounts from regular savers these will be deposited in a Post Office Savings Bank account until they reach €500.

This will have the effect of further depressing the interest rate regular savers will receive from the NSB.

So no matter how you slice and dice the numbers, the NSB only makes sense for someone prepared to leave their money untouched for 10 years. How many of us can either afford or are prepared to do this?

My advice to Lee is that with all of these rigidities and inflexibilities, the NTMA is not paying savers enough of a premium over savings bonds or certificates to justify locking away their money in the NSB for 10 years.

My family have held a small amount of shares for about 10 years in AIB, Bank of Ireland, Irish Life & Permanent, and Vodafone. As we are considering selling these shares, do you think this is wise and could you recommend which broker or brokers to use as we have no experience in this field.

Dessie

With AIB headed for State ownership, which will see existing shareholders either massively diluted or wiped out completely, Dessie should certainly be looking to sell his AIB shares. I would be in less of a hurry to sell the other shares.

If he does decide to sell some or all of the shares he will find it an expensive experience as, unless you already have an account with them, most of the Irish stockbrokers charge a minimum 1.25-1.50pc commission and the minimum charge per transaction is usually about €50.