The pensioner bond is a new savings product from the Government, issued via National Savings & Investments (NS&I), to help older savers get more from their money on deposit.
Who can apply for a pensioner bond
Only those aged 65 and over can invest in a pensioner bond.
How do pensioner bonds work
They are term based savings bonds. There will be 2 different terms available, a 1 year version and a 3 year version. All interest is paid annually and is taxable, although it can only be taken at the end of the term i.e. 3 years.
What rate of interest will pensioner bonds pay
The 1 year pensioner bond will pay 2.8% before tax each year, while the 3 year pensioner bond will pay 4% per annum. However, like bank interest, the interest on pensioner bonds will be paid net of basic rate tax. That means the net interest rates for basic rate tax payers will be 2.24% for the 1 year version and 3.2% for the 3 year version.
Are pensioner bonds competitive?
If you compare the pensioner bond rates to current best buy fixed rate bonds in the market of similar term (2% for a 1year bond and 2.55% for a 3 year fixed rate bond) then an already savvy pension saver (those already in the best deals) will be around £230 better off a year if they max out their pensioner bond allowance. That is £4.42 better off a week, hardly exciting but still worth it.
Of course those savvy savers who have already locked their money into best-buy fixed rate deals will be penalized if they pull the money out to take advantage of the new pensioner bonds. So they need to do the maths as to whether it’s worth it and check the terms and conditions of their current deals.
Will demand outstrip supply
Given that savers have had 6 years of paltry returns, demand is almost certain to outstrip supply. Not only will the new products offer market leading rates but we’ve known about them since the Budget earlier in the year. So with such a long lead time there will be savers who may have avoided taking alternative fixed rate deals, to avoid tying up their money, so they can take advantage of the pensioner bond.
If you just look at recent history, there’s been strong demand for market leading NS&I products (such as Index Linked Saving Certificates). Pensioner bonds will be issued on a first come first served basis so make sure you keep abreast of any news on the NS&I website.
With a maximum total allocation of £10billion being allowed by NS&I, that means only 500,000 people could benefit from the pensioner bonds, assuming they each put £10,000 into both versions of the product (1 year and 3 year).
Pros and cons of the new pensioner bond
- Backed by Government – so 100% secure
- No need to shop around
- Market leading rates
- They won’t pay monthly income as interest is payable at the end of the product term. A big negative for pensioners who need to live off their savings.
- The interest is paid net of basic rate tax (20%) like a bank account. But unlike a bank account you can’t elect to receive the interest tax-free (by completing an R85 form) if you are a non-tax payer. The tax will need to be reclaimed which is going to be an administrative headache for some pensioners.
- You can only put in £10,000 into each bond.
- Pensioner bonds are unlikely likely to spur the high-street banks and building societies to provide better rates if the pensioner bond is closed due to demand.
- Only available to those over age 65 (so some people could be receiving their state pension but be ineligible for the pensioner bonds)
How and when can you apply for a pensioner bond
They will be available in January and can be bought online, via post or over the phone.
(image by Witthaya Phonsawat, published via freedigitalphotos.net)