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
Pensioner bonds: how to apply
You can apply for a pensioner bond by phoning 0500 500 500 or online at www.nsandi.com/65plus. If you are already a National Savings & Investment customer you will need your account number and password. Payments will be taken by debit card.
It is also possible to apply in writing to National Savings and Investments, Glasgow, G58 1SB, and send payment by cheque. However, since time is of the essence an online or telephone application is more likely to be successful.
Pensioner bonds are only available directly from NS&I, so beware of any other sites offering to facillitate your application.
Pensioner bonds: in depth
How do pensioner bonds work?
Two types of bond are available, with both offering market-beating interest rates.
All over 65s are entitled to a one-year bond, which will pay 2.8 per cent, and a three-year bond paying 4 per cent. That is far better than anything currently available on the open market: the best commercial one-year bond is 2.02 per cent and the best three-year bond pays 2.51 per cent.
Anyone putting the maximum £10,000 into a pensioner bond will earn £78 more over one year than in a standard account, and £491 more over three years.
You can invest in pensioner bonds individually or jointly with another person aged over 65, and you can invest up to the £10,000 limit in both a one-year and a three-year bond. Couples can therefore invest a total of £40,000.
"These are absolutely market-beating rates, and I expect them to fly off the shelves," Danny Cox of Hargreaves Lansdown told the BBC before their launch.
How safe are pensioner bonds?
The bonds also offer complete security as they are backed by the government. There is no chance of losing your money.
Are there any drawbacks to pensioner bonds?
Limited availability: The government had initially limited the issue to £10bn and said they would be issued on a first come, first served basis. But when they quickly sold out, it extended the scheme until May 15, and did not put a cap on the investments that would be accepted.
Tax: The second disappointment with pensioner bonds is their tax status. They are not Isas so account holders will have to pay income tax on the interest they earn. The only way to avoid this is if your annual income is below the personal allowance, which is £10,000 this tax year. If you earn less than that a year from all your income streams you can claim back the tax via HM Revenue & Customs. And from April 2016, the first £1,000 of savings interest will be tax-free for basic-rate taxpayers (see above). If tax is deducted, that knocks the real interest rates down to 2.24 per cent on the one-year bond for basic-rate taxpayers and 3.2 per cent on the three-year bond. But that is still substantially higher than you can find on the open market.
Withdrawal penalties: You will be penalised if you access your cash before the one or three-year term is up. Do so and you'll forfeit 90 days of interest. This means they are not suitable for anyone looking to draw a regular income from their savings, which is a real shame as that is what many pensioners need.
Is there any way to get a regular income from pensioner bonds?
Strictly no, but the Daily Telegraph has come up with a ruse that let's you make use of pensioner bonds alongside instant-access bank accounts to give you a mixture of regular income and capital growth. Their financial experts say that you'll end up just £46 worse off than if you had put all your cash into a pensioner bond - and you'll benefit from an income throughout the four-year investment period. Click here for full details.
Will more pensioner bonds be offered in the future?
It's possible, and the first batch has already been extended, but for now the government has committed only to this single pensioner bond issue. "While it is possible there may be more in future months or years, there's no guarantee," says MoneySavingExpert. "Unless and until it's confirmed, it's not worth keeping cash out of other, higher-interest paying accounts just on the off chance."
Pensioner bonds: scheme extended until after election
The government's flagship pensioner bond scheme aimed at improving the finances of the elderly is to be extended until after the general election, George Osborne has announced.
The bonds, which offer those aged over 65 competitive interest rates of up to four per cent, will be on sale until 15 May due to unprecedented demand.
"Our 65-plus pensioner bond has been the most successful savings product this country has ever seen," said the Chancellor. "Over 600,000 pensioners have benefited from it." He also told the BBC's Andrew Marr show that encouraging savers was vital to the economic recovery.
Over £7.5bn of bonds have been sold, according to the Treasury, with the total expected to double before the deadline, The Independent reports.
While the extension will be welcome to those who were concerned about missing out on the market-beating rates, it has drawn criticism from Labour and independent analysts.
"Don't be surprised if George Osborne, as we get closer to an election, tries to give away all sorts of things when, actually, he is trying to erase the memory of how much he has taken away from pensioners," said shadow Treasury minister Chris Leslie.
The scheme has proven controversial, with some analysts warning that it distorts the market. "Borrowing more expensively than the government needs to is effectively a direct subsidy to wealthy pensioners from the working-age population," said Mark Littlewood from the Institute for Economic Affairs. "It's high time our politicians stopped buying votes with subsidies for the old and rich," he said.
Others have commented on the timing of the extension. "The fact that the newly-created window for investing in pensioner bonds closes not long after the general election polls do is a happy coincidence," argues the BBC's business correspondent Joe Lynam.
Pensioner bonds set to sell out: what are the alternatives?
It was the Black Friday of financial sales when pensioner bonds went on sale last week, writes Ruth Jackson. Over 65s were so keen to get hold of the market-beating interest rates on offer the National Savings & Investment (NS&I) website crashed and the phone lines were engaged 24 hours a day.
So why the pandemonium?
Pensioner bonds were unveiled last year by the government as a way of improving the finances of the elderly population. People in retirement who lived off their savings have struggled for years with pathetic interest rates that meant their money was shrinking in real terms. So, the government stepped in and offered two accounts to over 65s, a one-year bond paying 2.8 per cent interest, and a three-year bond paying 4 per cent.
The rates are impressive, and even after tax you can't match it on the high street – you'd need accounts paying 2.24 per cent over one year and 3.2 per cent over three. The best you can get in traditional savings accounts is 1.9 per cent and 2.51 per cent respectively.
Everyone knew these bonds would fly off the shelves, so the government capped them at a maximum investment of £10bn. Individuals can only take out one of each type of bond and deposit a maximum of £10,000 in each.
If deposits continue at their current rate, pensioner bonds are expected to be withdrawn from sale by the end of the month.
What are the alternatives?
If you don't qualify for a pensioner bond, have maxed out your investment, or they sell out before you manage to apply there are alternative ways to bag equivalent interest rates.
If you want to keep your money with a high-street bank then consider opting for a current account rather than savings. Nationwide's FlexDirect account pays 5 per cent interest on balances up to £2,500 for the first year. While Santander pays 3 per cent on balances between £3,000 and £20,000. To get those rates you do have to pay a set amount into the account each month - £1,000 to Nationwide and £500 to Santander – but that can be done by bouncing money between accounts or simply making the account your main current account that your wages go into.
Alternatively you could go for a regular savings account. These pay impressive rates if you pay in a small amount each month, so are a great choice if you are building up savings. First Direct pays 6 per cent, but you have to have a current account with them.
Another option is to save your money with a peer-to-peer lender rather than a high-street bank. There's more risk here – your savings aren't covered by the Financial Services Compensation Scheme – but they are worth a look.
Landbay is offering 4.2 per cent over three years, or RateSetter has 5 per cent over three years and 3.9 per cent over one year.
I need a monthly income
The big drawback with Pensioner Bonds is that your money, and your interest, are locked away for the length of the bond. With a lot of pensioners living off their savings this could be a big problem.
If you are looking for a way to save that allows you to draw a monthly income there are some good options out there.
Again peer-to-peer lending is one choice. Landbay offers an account that tracks the Bank of England base rate plus 3 per cent, so currently paying 3.5 per cent. That interest is paid monthly and you can withdraw it or your capital at any time. Ratesetter also offers a monthly term account paying 2.6 per cent annualised.
If you'd rather stick to the high street then Yorkshire Bank offers a three-year fixed-term bond paying 2.2 per cent interest with the option to receive the interest monthly. Alternatively, Vanquis Bank offers a five-year bond paying 3.2 per cent interest, which can be paid monthly.