13th January 2016
The first wave of NS&I 65+ Growth Bonds, known as ‘pensioner bonds’, will mature on Friday January 15.
NS&I has detailed the options for these maturing one year fixed term bonds: www.nsandi.com/65-guaranteed-growth-bonds. The original interest rate of 2.8% gross is not being repeated.
The bonds were open from 15th January 2015 until 15th May 2015, so the 1 year options will mature between 15th January 2016 and 15th May 2016. NS&I are writing to holders 30 days before their bond are due to mature. If no other choice is made the savers will automatically default into a further one year bond at 1.45%. Savers whose bonds have rolled over will suffer a 90 day interest penalty should they subsequently cash in and could get back less than they invested.
Danny Cox, chartered financial planner at Hargreaves Lansdown looks at five options for savers and investors at maturity:
1. Reinvest with NS&I for one year at 1.45%
“This is a reasonably competitive rate and has the added security of being NS&I and 100% backed by the Treasury. This is the default option if no other choice is made. An alternative with a higher interest rate is a one year bond with Paragon Bank at 2.01%, although clearly this doesn’t have the Treasury backing.”
2. Reinvest with NS&I in a 2,3 or 5 year bond
“NS&I are offering reinvestment into one of their other, longer fixed term bonds, offering 1.7%, 1.9% and 2.55% respectively. As with the one year reinvestment option, the rates are competitive but not necessarily market leading. The comfort and security of NS&I is clearly attractive.
Savers also have to consider the prospect of interest rate rises and how a 5 year fixed rate bond may look a good deal now, but could look pretty poor as and when rates start to rise.”
3. Get of jail (not free) card
“NS&I allow withdrawals from fixed term bonds early, but subject to a 90 day interest charge. This means you could opt for a 5 year bond, cash in after one year and receive a higher interest than the one year version, with the 90 day penalty reducing the interest rate from 2.55% to 1.92% before any tax.
However this strategy has some risks: If you cashed in within 90 days of the reinvestment you would get back less than you invested. Generally speaking I am not keen on taking out fixed term contracts with the view to cashing them in early, even though on paper this looks a good deal.
NS&I do reserve the right to change their terms and conditions so could, for example, increase the interest penalty in exceptional circumstances, such as excessive numbers of people cashing in early.”
4. Cash in and reinvest in cash ISA
“The NS&I bonds are taxable, so interest could be reduced by as much as 45%. The taxation of savings accounts is changing (see below) and many will lose their tax liability from April. However, a maturing savings bond or investment marks a good time to review issues such as tax and a reinvestment into an ISA tax shelter to save tax would negate the tax issue altogether and could provide a better net return.
For example, a higher rate taxpayer might receive £120.60 after tax interest on a £10,000 one year bond paying 2.01%, where as they would receive £175 from a one year cash ISA paying 1.75% (currently offered by Tesco Bank).”
5.Reinvest for the longer term and boost yield by 45%
“Those who don’t need access to their money and are considering a five year bond should consider taking more risk and investing in the stock market. An equity income fund such as Threadneedle UK Equity income within a stocks and shares ISA is currently yielding a tax free return of 3.71%, which is 45% higher than the 2.55% offered in interest by the five year NS&I bond.
There is risk to both capital and income. However over a five year period investors should see a positive capital return and the yield can either by withdrawn as income or reinvested to boost the capital.”
Tax on savings bonds is changing from April
For bonds maturing before the end of this tax year, basic rate tax at 20% will be deducted from the interest at source. Someone who invested the maximum of £10,000 will have £224 interest, a total of £10,224 to rollover, reinvest or cash in.
Higher rate taxpayers will be subject to a further 20% tax (£56) on the interest, declared through self-assessment, and additional rate taxpayers a further 25% (£70) income tax.
Bonds maturing 6th April 2016 and onwards should receive their interest gross, since all cash deposits and fixed term bonds will pay interest without tax deduction from that point and could be tax free if within the new personal savings allowance.
New Personal Savings Allowance (from 6th April 2016)
If the interest on maturing bonds, when added to all other savings interest (including corporate bonds, gilts, P2P interest), is less than £1,000 then basic rate taxpayers will have no tax to pay. The limit for tax free interest is £500 for higher rate taxpayers and zero for additional rate taxpayers.