The interest rates for the pensioner bonds, announced in the Autumn Statement have been confirmed as the rates trailed in Chancellor George Osborne’s March Budget.
According to National Savings & Investments, which is to provide the bonds, the rates are set at 2.8 per cent for one year and 4 per cent a year for the three-year bond.
This is significantly higher than the leading rates available on the open market, which are currently 1.85 per cent for a one-year bond and 2.5 per cent for a three-year bond.
Available from next month, the NS&I Income Bonds are available to the over-65s. Investments of between £500 and £10,000 can be made in each one-year or three-year bond and a maximum £20,000 per person or £40,000 per couple, single or joining applications can be made.
Interest will be payable annually and will be taxable. Basic rate tax will be deducted automatically at 20 per cent regardless of the rate of tax paid by the individual, so tax will not affect basic rate taxpayers.
Higher and additional rate taxpayers will have to pay an additional 20 per cent and 25 per cent in the year the interest is paid.
This might end up with some people paying £80 a year.
Non-taxpayers will need to reclaim the tax paid, as the bonds are not part of the R85 scheme, which allows interest to be paid gross.
Henry Cobbe, founder of the BirthStar Project, said: “The Pensioner Bond is a great interim solution while providers and pensioners adapt to the new legislative environment.
“However with the originally proposed maximum issue size of £10,000, a three-year term, and limited release, this is not going to provide a comprehensive answer to people’s long-run requirements in retirement.”
He said it would be preferable for the Bond to be inflation-linked, but added: “We doubt NS&I would want to stand accused of crowding out providers with materially above-market rates, particularly when Bank of England rates are so low.”
Instead, Mr Cobbe believes providers are gearing up to release a “matrix of solutions, including age-based funds, forward start annuities, capital guarantees and collective drawdown arrangements.”