George Osborne announced the special Pensioner Bond in his Budget as a ground-breaking new product for pensioners (alongside the pension changes in 2015). They were meant to offer market-beating rates and transform income-producing options for retired people.
But now the details of the product have been revealed, two major flaws in the product have emerged, which will be a massive disappointment for thousands of pensioners.
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Perhaps the most fundamental is that pensioners using savings accounts are overwhelmingly using the monthly interest payments to produce an income. The problem they are facing is that since the financial crisis, the returns on these savings accounts have dwindled to the bare minimum, causing monthly incomes to fall to painful lows for many retired people.
The bonds were expected to solve that problem. Like the old NS&I Pensioners Guaranteed Income Bond (which was withdrawn in 2008) they were expected to produce regular income through interest payments - but at a much higher rate that the savings accounts currently on the market.
If you sign up for the one year bond, you have to wait 12 months before you receive any interest at all. If you sign up for three years, you'll get nothing until that bond runs its full term. It makes them useless for producing an income, and therefore an abject failure as a replacement for a savings account.
To add insult to injury, the bonds will be taxed at 20% - so non-taxpayers will have to claim the tax back from HMRC. They have no option of filling out form R85 (like they do with bank accounts) to enable the interest to be paid tax free.
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The bonds will launch in January through National Savings & Investments, and despite these fundamental flaws, the experts expect them to be enormously popular.
The upside is that the rates on these bonds are expected to be far better than those available elsewhere in the market. The exact rates will be outlined in the Autumn Statement, but the Mail says they are likely to be 2.8% for the one year bond and 4% for the three year one.
As a result, despite the fact that they won't do the one thing we know that pensioners need them to do, a huge number of people are expected to put the maximum of £10,000 into each of the bonds, and as a result it will sell out.
For pensioners this is clearly a major disappointment. For the government, meanwhile it's a winner all round: they get to announce a fully subscribed bond for their favourite voters: pensioners; they get a ton of cash pumped into government through the bonds; and they don't have to offer income in order to achieve it. The fact that pensioners will still be left with a major headache when it comes to producing income is clearly not their priority.
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