Industry figures are critical of the government’s new bonds for those aged 65, stating that while the interest rate is high, it does not offer a monthly interest option for those who want to supplement their income and there is a danger that the bonds will become over-subscribed.
On Friday, the government announced new bonds for those over 65 years of age which will pay savers the best available interest rates.
The one-year bonds will pay an annual interest rate of 2.8 per cent, and the three-year bonds will pay 4 per cent, both being available from January.
With an investment limit of £10,000 per bond per person, the government expects they will help an estimated 1m pensioners. The bonds will be available directly from NS&I by post, phone or online.
Investors can hold bonds jointly, but this will still count towards their individual limits – i.e. a couple could hold £40,000 jointly. There is a minimum investment of £500 per bond.
Rachel Springall, finance expert at Moneyfacts, said that the deals are likely to be taken up very quickly, but noted that the fact that they do not offer a monthly interest option will be disappointing to those looking to supplement their income.
“Restricting these bonds to those aged 65 and over will dishearten younger pensioners, particularly those who miss out by one year, as they will have to just make do with what’s already on the market, which is poor in comparison.
“There is a danger that these bonds will become over-subscribed and this could mean they are only handed out on a first-come, first-served basis.”
Chris Williams, chief executive of online investment advisor Wealth Horizon, pointed out that the bonds are not the only way to outpace rates offered by banks and building societies.
“Indeed, while the rate might grab the headlines, paying into a long term investment strategy and building on its compound interest is likely to be a lot more profitable in the long run.
“However, there is a sting in the tail of these bonds that people need to be aware of. Those who take out the bond will have to pay tax annually on the interest accrued each year, but the bond itself will only pay out at the end of the term.
He added: “This means that higher rate tax payers will need to find this money from their own pockets in the first instance or have it deducted from their pension income.”
Alan Higham, retirement director at Fidelity, stated that while their appeal may be broad, their value is greater for the pensioner on a lower income, the majority of whom will not pay tax as a result.
“As non-tax payers, they need to look beyond the headline rates as they will taxed at first so 4 per cent becomes 3.2 per cent and 2.8 per cent becomes 2.24 per cent. Therefore, it must be highlighted that they will need to fill in the relevant R40 form to claim this tax back.”
He added that there will almost certainly be strong demand for this bond, but due to the £1bn limitation, supply is limited.
peter.walker@ft.com
