Looking behind pensioner bonds

    Looking behind pensioner bonds

    After much anticipation, the long-awaited National Savings & Investments 65+ Guaranteed Growth Bonds have finally arrived.

    Rewind back to 2014’s Budget for savers, as the chancellor pledged his support for those facing or in retirement. It was announced that £10bn would be available for those aged 65 and over, in the form of fixed-rate, fixed-term savings accounts. With a maximum of £10,000 a bond, a person, this would mean around 1m bonds will be up for grabs. With over 11m pensioners in the UK, though, they were always likely to be very heavily subscribed.

    Pensioner bonds

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    The Budget confirmed that these ‘pensioner bonds’ would be available in two terms; a one-year fixed-rate term and a three-year fixed-rate term, with rates at the time of the Budget predicted to pay around 4 per cent fixed for three years and 2.80 per cent fixed for the one-year term. These indicative rates were head and shoulders above the nearest competition.

    Fast forward to December, shortly after the Autumn Statement. With no rise in the Bank of England base rate, these rates were confirmed to pay exactly as indicated, 4 per cent and 2.80 per cent. These rates pay way over the current best rates on the market: 53 per cent more than the average of the top five one-year rates, and 62 per cent more than the average of the top five three-year fixed rates.

    To further put this into context, the current market-leading one-year fixed-rate bond is paying 2.00 per cent gross/AER from the Punjab National Bank, 0.80 of a percentage point less than NS&I. If you compare this to a high street provider rates are much lower. The Post Office is paying 1.71 per cent gross/AER fixed for its one-year bond, over 1 percentage point lower than NS&I.

    The best three-year fixed-rate bond is also with Punjab National Bank, paying 2.55 per cent gross/AER. And again the best from the high street is the Post Office paying 2.31 per cent gross/AER fixed for three years, a huge 1.69 per cent less than the NS&I three-year option, which is more interest than you can earn from most standard variable rate savings accounts.

    The bonds are available on a minimum of £500 up to a maximum of £10,000 a person, each account. This means that an individual could invest up to £20,000, opting for one of each term, and a couple could invest up to £40,000 between them, as bonds can be opened in joint names.

    Surprisingly both bonds allow access within the term, subject to a penalty equivalent to 90 days’ loss of interest. Interestingly this means that savers who opt for the three-year bond but choose to withdraw funds after one year, should still earn a higher rate of interest over one year than if they had opted for the one-year bond from the outset. This is even after the 90-day interest penalty has been deducted simply due to the higher rate being paid in the first year.