Savers got a bit of a fillip last month when the National Treasury Management Agency (NTMA) said it would increase interest rates across its State savings products – the first time it has done so since 2023.
Until then, rates on offer across the platform had fallen below what was available in the wider market. This meant that Irish savers’ love affair with prize bonds and An Post savings accounts had begun to dwindle.
Figures show that, as of end July, sales to date this year were €200 million (so about €342 million on an annual basis). This compares with sales of €489 million in 2023 and €736 million in 2020.
So, should State savings products be back on your radar following the latest changes? And what about prize bonds?
Rate hikes
The increase in State savings interest rates comes as the cost of financing Irish government debt continues to rise.
Kevin Timoney, chief economist with Davy, notes that the yield on 10-year Irish debt is now about 3.4 per cent, so institutional investors are still getting significantly more for lending to Ireland than households are even after the latest increases.
Debt costs are on the rise. Last year, the average rate on outstanding government debt was just 1.5 per cent. Now the Government is guiding that its annual debt interest bill will double, from €3 billion to €6 billion, by the end of the decade.
What’s behind the increase?
“Government debt levels globally are driving it up for everyone,” says Timoney, adding that Ireland’s cost of funding is actually cheaper relative to other countries. “Ireland’s debt is getting more valuable to hold than other countries, as it’s seen as a safer credit than it previously was.”
The yield on 10-year French bonds, for example, is currently about 4.08 per cent. It’s 3.6 per cent in Portugal, and 4.65 per cent in the US, where bond investors are beginning to get rattled as the debt pile hits a record $40 trillion and Donald Trump’s policies look certain to push it higher.
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Against those comparisons, perhaps the NTMA is looking to enhance its chances of borrowing from households, by making the rates more attractive even if it is less than government bondholders get.
Should it then close the gap even further between what the Government pays institutional investors when borrowing and what it pays retail savers through State savings?
Although there might be some €170 billion of household savings on deposit in Ireland, a large proportion of this is held in overnight accounts. Timoney says that even if the NTMA was to bring rates higher, it wouldn’t necessarily translate to a huge move into State savings.
“I’d be conservative in my estimate as to how much it would affect behaviour,” he says.
So, for now, State savings are likely to remain steady as a proportion of overall Government borrowings, at about 9 per cent.
Savings products
When it comes to State savings, the recent increases have been applied across the board to the range of the NTMA’s household savings products, generally available through An Post.
Last month, you would have earned a return of €4,400 on a deposit of €20,000 held for 10 years. Now, you can earn up to €6,000 on the same deposit over the same period. That’s a noticeable uplift.
One big advantage of such a product is that you are not locked in. You don’t have to hold it for 10 years, there is no penalty if you cash in early, you will just miss out on future interest payments, said a spokesperson for State savings.
Another significant advantage of these products is that they are tax-free – no deposit interest retention tax (Dirt) of 33 per cent is due on any gains. That enhances its attraction when compared with bank interest rates, which are subject to Dirt.
But how do these new interest rates compare with market rates?
The best rate for a fixed-term deposit of longer than three years from banks is the 3.16 per cent annually on offer from Aareal Bank, via online platform Raisin, over seven years.
Among Irish banks, the best long-term rate is 2 per cent annual equivalent rate (AER) from Permanent TSB over five years. It offers a return of €2,082 in interest earned over the term on that same €20,000 investment, or a total return of 10.41 per cent. So that is less than the €2,400 you’d now make from the NTMA.
Not only that, but as you pay your Dirt on this gain, your net return from PTSB will drop to just under €1,400. Even the market-leading rate for Aareal leaves you €145 short of the NTMA offer.
In that case, a switch to State savings might make sense.
Win a prize
The other big household offering from the NTMA is prize bonds, which have traditionally been perennially popular with Irish savers, and are also popular as gifts.
Latest figures show that some €4.4 billion is currently invested.
However, again, their popularity has waned of late. Annual sales last year were €365 million, with some €44.4 million awarded, across 458,870 prizes. Back in 2020, annual sales peaked at €735 million, even though just €19.2 million was awarded across 280,333 prizes.
You can buy prize bonds from as little as €25 for four, up to a maximum of €250,000, or 40,000 prize bonds.
But how do they work?
Well, when you buy a prize bond, rather than receive an interest rate on your investment, you’re actually buying entry to multiple prize bond draws, which pay out a certain ratio of the fund in prizes.
Your bonds continue to be included in draws until you withdraw your money.
The value of the prize fund is determined by the interest rate set by the NTMA – the lower the rate, the lower the value of prizes on offer.
Until last month, a rate of 1 per cent applied (total winnings on the week of August 14th were €724,400). This has since increased to 1.5 per cent, which means a greater payout rate.
The new rate compares favourably with recent years. In 2019, for example, a rate of just 0.5 per cent applied. But it remains significantly lower than what was available in the years following the financial crisis, when a rate of 3 per cent applied.
The latest increase to the rate should mean that the prize pot will increase from €44.4 million last year to about €66 million on a full-year basis.
Prizes will be paid out as follows: €500,000 in the last draw of the month; one €100,000 prize each week; 50 €1,000 prizes; and €100 for all other prizes, the number of which will change depending on the value of the prize fund.
Inflation risk
Although there might be an element of fun and surprise in putting your money in prize bonds, there is also uncertainty. And as interest rates on regular savings products have risen in line with ECB rates, it might explain why annual prize bond sales have slipped.
One of the biggest risks of putting your money into prize bonds is that you never win. While, unlike the Lotto, you at least get your money back when you cash your bonds in, the real value you get at the time is likely to be less than what it was when you first invested.
For example, the real value today, according to the CSO’s inflation calculator, of €5,000 invested five years ago, is €6,210.71 – but you will only be getting €5,000 back from State savings if you cash in your prize bonds. You can see clearly the degree to which your prize bonds have failed to keep up with inflation.