Three alternatives to pensioner bonds for your savings
From Isas to higher-rate bonds and select current accounts, how you can beat the new 1.45 per cent pensioner bond payouts
When the government’s National Savings & Investments (NS&I) launched Pensioner Bonds last January there was pandemonium. These accounts aimed at the over 65s offered such good interest rates that the NS&I website crashed and the phone lines were engaged solidly for 24 hours.
Now, the one-year bond has matured. Anyone who hasn’t moved their money will be earning 1.45 per cent - a steep drop from the original market-leading 2.8 per cent. So, what should you do with your cash?
In order to beat the initial rate you were getting you’ll have to think outside the box, but it is easy to beat the 1.45 per cent you'll be getting now.
“Ensure you move your money when you get your letter from NS&I,” says Andrew Hagger, founder of Moneycomms.com, in The Telegraph. “There’s no reward for loyalty and there are many better paying options to choose from – even the best instant-access accounts match the 1.45 per cent paid by the new one-year NS&I bond.”
Open an ISA
Just because you are over 65 doesn’t mean you shouldn’t consider your tax liability. If you earned more than £10,600 this year you would have paid income tax on your savings interest, which could make a serious dent on your returns. Opt for an Isa and any interest you earn is tax-free. The best one-year ISA pays 1.65 per cent from Virgin Money.
From April, in addition to an increase in the personal allowance before tax becomes payable to £11,000 a new Savings Allowance is being introduced. This will mean basic-rate income taxpayers can earn up to £1,000 a year in interest on their savings before they have to pay income tax (higher-rate taxpayers can only earn £500 a year).
That could mean Isas aren’t the best option as standard accounts pay higher interest rates – the best is currently 1.91 per cent from Paragon Bank for a one-year bond.
Take a look at notice accounts
Don’t assume that a one-year bond is the best place for your money. At the moment you could get marginally more money by going for a notice account instead. Paragon Bank is paying 1.96 per cent on its 120-day notice account.
Consider a current account
In order to get the highest possible interest rate you should consider putting your savings in a current account.
If you have less than £5,500 then you should consider TSB and Nationwide. The former pays 5 per cent on balances up to £2,000 and Nationwide pays the same high rate on balances of up to £2,500. Both accounts require monthly funding (£500 for TSB and £1,000 for Nationwide), but if you split your money across both accounts you can just set up two direct debits to bounce cash between the accounts each month.
If you have between £5,500 and £20,000 then you could put it in Santander’s 123 account and earn 3 per cent interest. There is a monthly charge of £5 but even after paying that you’ll be getting a better rate than on any other account if you have a balance of more than £6,000 - and there's cashback on bills so you might earn back the fee anyway. Again you’ll need to fund the account with £500 each month too.
After pensioner bonds: where next for your savings?
Pensioner bonds were celebrated by campaigners for the elderly and derided as a pre-election "bribe" by others. What is undisputed is that they were immensely popular.
The Daily Telegraph notes that £13bn was invested in the one and four-year savings products between January and May last year. In fact the huge volume of investment is partly blamed for retrenchment from National Savings and Investment this year (see below), as it attempts to meet a stricter government funding target.
The bonds were popular because they paid over-65s an interest rate that smashed what was available elsewhere: 2.8 and four per cent for one year and three-year bonds respectively. Now that the first of the one-year bonds issued is maturing next month, where should you go with your savings?
The first thing to note is that the 2.8 per cent cannot be replicated by rival bonds. Moneywise says the best one-year rate available is from Shawbrook Bank, which pays 2.15 per cent. Firstsave and Milestone Savings are both offering products paying 2.1 per cent.
It's significant that these are both so-called 'challenger' banks. Among the larger high-street lenders rates are much lower and in fact only around half of that you would have got this year from the pensioner bond. Nationwide Building Society offers a bond paying 1.5 per cent and Clydesdale and Yorkshire offer one paying 1.4 per cent.
You could use a longer-term bond, such as the three-year 2.73 per cent fixed rate from Firstsave, but these are more directly comparable to the four per cent offered on the longer-dated NS&I pensioner bonds.
But savers should not feel constrained by attempting to put their money into bonds – or even into Isas which offer tax benefits but comparatively poor rates of interest unless you are willing to lock your money up for extended periods (see below).
The Telegraph says instead that some fee-paying standard accounts are currently offering among the most eye-catching returns. This includes the Santander 1,2,3 account, which will cost £60 per year from next year but offers three per cent on balances between £3,000 and £20,000, plus cashback on bills. TSB and Nationwide both have accounts paying five per cent on balances of up to £2,000 and £2,500 respectively, with some remote access restrictions.
You can also get interest rates of five or six per cent on regular saver accounts from First Direct, Marks and Spencer, TSB and Nationwide, but most come with access restrictions. You'll need to pay in regular sums, often capped, to use these accounts, but if you have a few accounts you could achieve this with simple standing orders.
NS&I Isa rate cut: three alternatives for your savings
A cut to the interest rate offered on the National Savings and Investments easy access Direct Isa came into effect yesterday, and The Times predicts that the 400,000 people who have £3.8bn invested will lose a total of around £50m in interest on the new lower rate of 1.25 per cent over the next five years.
It's part of an attempt to ensure the government-backed provider is not distorting the market – and limit the cash it takes in to meet Treasury targets (see below). So what can savers do to replace that lost income without losing access to their money?
Actually, NS&I wasn't paying the best rate in the market for an unlimited withdrawal Isa. The highest rate of interest is the 1.65 per cent offered by Punjab National Bank, but you need to get this in branch – and there are only seven of them in the UK.
The Post Office is offering an online Isa that pays 1.51 per cent, but this includes a bonus of 0.86 per cent over the next 12 months after which the rate will revert to 0.65 per cent. This is pretty poor, so you'd want to switch out after a year.
Unless you really need instant access to your savings, Moneysavingexpert suggests a fixed rate alternative. And even if you dip into these accounts more than you should, some pay a much higher rate of interest that could still make it worthwhile.
It cites the example of Coventry Building Society's account offering a fixed rate of 2.4 per cent until May 2020. If you need to get at your cash you forfeit 120 days' interest, but if you did this at the end of your first year you'd still have effectively earned 1.61 per cent. Withdraw after three years and you'd have earned 2.14 per cent on average.
Beyond this there are 'defined access' Isas such as one from Virgin Money, which pays 1.56 per cent but only allows three access points to your cash each year. Go in for a fourth time and your rate will fall to 0.75 per cent.
It's not all about Isas, either. Some current accounts offer very high rates, but typically you either need a very high or a very low balance to benefit.
Take the Santander 123 account, which offers three per cent interest on balances of between £3,000 and £20,000. The account does charge £5 a month from January, so to really benefit you'd need to be at the top of this range.
And the other end of the scale is the 4.89 per cent available from TSB and Nationwide, for which you can hold no more than £2,000 or £2,500 respectively, the Daily Telegraph notes. The Club Lloyds Current Account pays 3.93 per cent on balances between £4,000 and £5,000. You could take advantage of these rates by spreading your money around.