Updated 23 January 2017
The new high-yield Pensioner Bonds for older savers could help many people achieve a better retirement income. The trouble is, they look too good – so they may end up selling out faster than Neil Young tickets. Should you join the stampede or not?
When the surviving members of Monty Python announced their live comeback shows, tickets for the first performance at the O2 sold out in a record 43.5 seconds. Much of that same audience may well be interested in the new Pensioner Bonds from NS&I. That record sell-out time may not quite fall but still, one can almost hear the revving of engines.
The reason for the hoo-ha is clear. Right now savers aren’t exactly spoilt for choice. The effect of rock-bottom interest rates has been exacerbated by the Funding for Lending scheme. FLS was introduced in 2012 to encourage banks to lend more mortgages, but a side-effect has been that banks now rely less on savings deposits to fund their lending – so savers’ rates have sunk even lower. The oldest savers are hardest hit, since interest from life savings is a common supplement of retirement income.
Hence the huge interest in Pensioner Bonds. That’s no play on words: these bonds are set to nearly double the best rates offered by any bank or building society. The best rate you’ll find on an ordinary three-year bond is around 2.55 per cent, while the best one-year bonds pay just 2 per cent. By contrast, a one-year Pensioner Bond will pay 2.8 per cent, while a three-year Pensioner Bond will pay a whopping 4 per cent. No cash ISA on the market can approach that, while a stocks-and-shares ISA is less suited to pensioners due to the higher levels of risk.
The other big attraction of Pensioner Bonds is that they are offered by NS&I, and so come with the Treasury guarantee that means your money is totally safe.
Who’s likely to benefit?
Available from January 2015, Pensioner Bonds will only be issued to individuals aged 65 or over. Even so, that puts today’s potential market at over 11 million people and rising. You can take out both a one-year and a three-year bond if you wish, putting up to £10,000 in each (£500 is the minimum), so the total you can invest is £20,000. But even with these restrictions, it looks likely that most of those 11 million savers will be disappointed, because the total savings pot is capped at £10 billion. If every saver uses their maximum allowance by taking out two bonds of £10,000 each, then just 500,000 people could use up the whole savings pot.
So who might these lucky few be? One potential downside of the bonds is that they would not provide a monthly income – the interest will be paid only at the end of the term (one year or three years). This might put off pensioners who need a regular income supplement now, and can’t afford to leave a large sum untouched for one to three years. A second drawback is that the bonds will be taxed at 20 per cent before any interest is paid. Non-taxpayers (anyone whose income is below the taxable threshold, e.g. most retired people) would therefore have to claim this tax back from HMRC – a frustrating administrative hurdle.
So already there have been grumbles on social media that these bonds won’t benefit the people who need them most, but will be swept up by the wealthier few. That’s arguable – but it need not be the case.
Advice brings more choices
For one thing, other aspects of pension reform may come to the rescue. The fact that buying an annuity is no longer a legal requirement means that many more pensioners will have a substantial pot of money on hand when they retire. This should mean that it is not just ‘the rich’ who can afford to buy the full allocation of Pensioner Bonds, or be able to wait three years before withdrawing funds. As to the issue of reclaiming the tax, this need not be a headache either. It’s a good idea in any case to seek independent financial advice at retirement, so ask your IFA to talk you through your options and explain anything you might not fully understand. An adviser can also help you decide whether Pensioner Bonds are truly right for you – and they can certainly find you the best alternative option if the shelves are bare by the time you get there. Expert advice is available and affordable for all, when the long-term benefits far outweigh the initial cost.