Why Pensioner Bonds don't go far enough
January is going to be a good month for the finances of over-65s with the launch of government backed, inflation-beating pensioner bonds. But, they have a sting in their tail.
This month sees the launch of a brand new savings product designed to help pensioners earn a better living from their savings. The government-backed National Savings & Investments will launch two new fixed-rate bonds available only to people aged over 65.
These pensioner bonds will pay interest rates of 2.8% on a one-year bond and 4% on a three-year bond. That is well above any rates available on the open market where the best one-year rate is 2.02% and 2.51% for a three-year bond.
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So far it all sounds great. All pensioners are entitled to hold one of each type of bond with up to £10,000 invested in each. Anyone investing the maximum amount would earn £78 more in the one-year bond than in any equivalent standard savings account, and £491 over three years.
The bonds are certainly a step in the right direction when it comes to helping improve the financial situation of the nation's pensioners, but they are far from perfect. In fact there are several issues you need to be aware of.
Not for everyone
Firstly, the government isn't going to let everyone have one of these bonds. They have capped the amount that can be invested at £10bn. If everyone who opens a bond invests the maximum amount that will mean only one million pensioners get a bond – leaving around 11 million struggling with the below inflation interest rates available on the open market.
So, the accounts are the tiniest of sticking plasters on an enormous problem. Many pensioners are reliant on their savings to get by but most are seeing their savings eroded by inflation. Every year the money in their bank accounts is worth less as the interest they earn is less than the rate of inflation.
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Another issue with these pensioner bonds is that they haven't been designated as ISAs. In a bizarre move they are standard savings accounts, and they are not within the R85 scheme. This means that the interest earned will have income tax automatically deducted from it. Many pensioners don't earn more than their personal allowance (at least £10,000 a year) so are not liable for income tax.
But, because the accounts are not within the R85 scheme they can't even fill out a form to prevent the tax being taken. Anyone who holds a pensioner bond but shouldn't pay income tax on their interest will have to claim that tax back themselves by contacting HMRC. A big faff, that many won't bother with, allowing the taxman to get his hands on cash he is not entitled to.
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Even with the tax deductions the bonds still pay more than the open market but it is infuriating that the interest will be taxed so unnecessarily.
Monthly interest
For me the biggest problem with pensioner bonds is that you cannot draw a monthly income from them. Money invested cannot be withdrawn until the bonds mature so will be locked away for one or three years. If you do make withdrawals during that time you'll lose 90 days interest.
This is a huge drawback to the bond and likely to put many pensioners off. A lot of people over the age of 65 live off their savings as well any pension income they receive.
As a result many will need accounts that pay them interest monthly and with that interest paid into another account. Not allowing monthly interest payments on pensioner bonds is going against one of the main things many pensioners need – a regular income.
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As with so many things this government does pensioner bonds are a small step in the right direction but not the large stride needed.
The Treasury has addressed the problem of inflation by providing a bond that boosts their tax income by deducting income tax from accounts that in many cases shouldn't be liable for it. They have also designed bank accounts that lock away people's cash at a time when they most need to be able to access it.
An income-paying, ISA version of the pensioner bond would have been perfect, but instead the over 65s will have to settle for accounts that beat inflation and prepare to have to tackle HMRC to reclaim any undue tax charges. If you decide you want a bond you'll need to act fast when NS&I announce the bonds are available. Even with their drawbacks pensioner bonds will sell out fast.
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