New ‘pensioner bonds’ to pay up to 4%

12th December 2014

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New government-backed NS&I ‘pensioner bonds’ will pay up to 4%, beating the market rates currently on offer.

Pensions minister Steve Webb has announced the rates for a new bond, that will only be available to those aged 65 and over. The one-year over-65 bond will pay 2.8% and the three-year over-65 bond will pay 4%.

The bonds will be available some time in January but details have not yet been issued by N&SI.

The pensioner bond returns were trailed in the Budget in March when chancellor George Osborne said they would be market beating, to make up for the fact that pensioners were being hit by low interest rates on their savings.

And he has stood by his promise. The average one-year bond pays 1.46% while the best buy is just 1.9%. In the three-year market, the average bond is paying 2.05% and the best on the market paying 2.51%.

The bonds will be available from January and pensioners will be limited to placing £10,000 in each bond, meaning £20,000 in total per individual.

Rachel Springall, finance expert at comparison site Moneyfacts.co.uk, said: ‘Today’s announcement regarding the pensioner bond is going to cause a stir as there are many people holding out for decent savings rates to be introduced into the market.

‘These deals are likely to be taken up very quickly, so registering for the newsletter and keeping an eye out for the launch date is vital so savers don’t miss out.’

However, she said there was a downside; that the bonds do not offer a monthly interest option, which ‘will be disappointing to those looking to supplement their income’.

She added: ‘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.

‘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.’

Danny Cox, head of financial planning at Hargreaves Lansdown, said he expected the bonds to sell ‘like hotcakes’ and he ‘would be surprised to see any left on the shelves after a few weeks’.

“After using your cash ISA subscription these bonds should be close behind on the cash saver’s shopping list,’ he said.

“There is off course a cost to the taxpayer from this government largesse, estimated in the Budget to be in excess of £300 million. Some will think this is a small price to pay to give something back to the pensioner community, after loose monetary policy has devastated their fixed income streams.”

Anna Bowes, director at Savingschampion.co.uk said: “Finally some decent savings rates are to come on to the market. These new rates are head and shoulders above the nearest competition, paying 51% more than the average top 5 one year fixed rate, and 61% more than the average top 5 three year fixed rate. We suspect demand will be high as savers rush for better returns on their cash.

Yet again it’s a government initiative driving the savings market, but at least this time it’s in the right direction. The Funding for Lending Scheme (FLS), introduced almost two years ago to boost the housing market by offering banks and building societies access to cheap funding, was the catalyst for plummeting savings rates. It remains disappointing that we seem unable to let the banks battle it out between themselves for both competitive lending and deposit taking as so far, the side effects of meddling have been disastrous for savers. And with the recent confirmation that the Funding for Lending is to be extended for yet another year, the misery looks set to continue.

“We of course advocate searching for the very best rates available and pensioners who can take advantage, should. But those who are not eligible may want to put things into perspective. Compared to the best like for like alternative 3 year fixed rate bond, savers will be missing out on at most £150 extra gross interest per year, on a 1 year it’s just £80 – not significant or life changing. Added to this is the fact that savers are unable to take an income from the bonds along with a restricted, low maximum of just £10,000 per person, per bond, there are other options.”

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