Keeping a promise made at the last Budget, and in response to lobbying from some pressure groups, January 2015 finally saw the launch of the so called Pensioner Bonds by the Treasury.
The government backed 65+ Pensioner Bond are available from National Savings & Investments, and only those over 65 are eligible to invest in the bonds. Investment is limited to £10,000 in each type of bond (making a maximum investment per individual being £20,000), and will be available in one year’s bonds with a 2.8% interest rate, and three year bonds with a rate of 4%. Despite savings rates having fallen since the bonds were announced last March, the Treasury has kept to the interest rates it predicted at that time.
The financial sector has praised the Pensioner Bonds, which have a market leading interest rate. Indeed, comparisons with similar, private bonds (or indeed other public bonds) show this clearly. The returns are very favourable. Those investing the maximum amount will get a return of £280 from the one-year bond pre-tax, £95 more than from the best equivalent bond currently available elsewhere. Investing the maximum in the three-year bond will see a pre-tax return of £1248, £480 more than from the best equivalent bond elsewhere.
However, despite the hype and capital gains, there are warnings and points for pensioners to consider. Indeed, some financial commentators have criticised the bonds, claiming that the government has prioritised pensioners over workers amidst other concerns. Additionally, and crucially, investors will be taxed on the significant yields from the bonds. For example, those on a basic rate tax will have 20% deducted from the interest they earn, therefore reducing the returns; a one-year bond will yield £224 after tax, and a three-year bond £991.
Despite that, and other caveats, the Pensioner Bonds have proved very popular. When they were first launched, demand caused problems with the N&SI servers. Within hours of the bonds going on sale, NS&I reported problems with their servers, and potential investors reported long waits trying to contact NS&I. This led to great frustrations from would be investors, who simply could not invest. Difficulties were compounded by uncertainty as to when the bonds actually did go on sale, and that over one million people had registered to receive information about the bonds. However, N&SI and the Treasury have advised not to panic, and apologised. Although there are a finite number of 65+ Pensioner Bonds, (£10 bn were put on sale) predictions were that it would take few weeks to sell out, not a few days.
The success of the launch and initial sale was evident immediately. Figures showed that 26,000 bonds had been sold in the first afternoon, raising £270m. After being launched on a Thursday, the Saturday saw £1.5 bn of the bonds sold already. Citing a probable rise in interest rates, Danny Cox, from investment firm Hargreaves Lansdown said that “back in 2011, the popular NS&I index-linked certificates sold £5bn in four months before being closed. This year’s bonds are a different product, but I would be highly surprised if the £10bn allocation lasts until the new tax year in April… these new bonds [are very] attractive and I expect them to sell like hotcakes.”
The bonds certainly have proved very popular, and have been warmly welcomed by savers and financial advisers alike. A good way to start the year as regards personal finances- and this an election year.