Synopsis: The rates have been announced for the much-trailed pensioner bonds. But Class 3A contributions could be a better bet.
Date posted: Tuesday, December 16, 2014
‘…many pensioners have seen their incomes fall as a consequence of the low interest rates that Britain has deliberately pursued to support the economy. It’s time Britain helped them out in return.
So we will launch the new Pensioner Bond paying market leading rates. It will be issued by National Savings and Investments, open to everyone aged 65 or over, and available from January next year. The exact rates will be set in the autumn, to ensure the best possible offer – but our assumption is 2.8% for a one year bond and 4% on a three year bond.’
So said George Osborne in the Budget on 19 March 2014. The accompanying Budget Red Book said that ‘Precise details will be confirmed at Autumn Statement 2014, to take account of prevailing market conditions at that time.’ When no such announcement appeared on 3 December, suspicions started to appear that the ‘market leading rates’ were not going to be quite so market leading. The doubts grew stronger when the rate announcement was scheduled for 4pm on a Friday afternoon, late enough to limit coverage in the weekend personal financial pages.
In the event, it was probably just a canny piece of marketing by the Treasury, as Mr Osborne duly announced on Friday that the rates would indeed be 2.8% for one year and 4.0% for three years. These are indeed top of the market – the best one year fixed rate is 1.90% and the best three year is 2.50% according to Moneyfacts. For the government, raising finance in this way is expensive and some would say little more than an electoral bribe: one year gilts yield 0.34% and three year gilts, 0.63%.
The key points about the new bonds are:
• Although they are widely referred to as Pensioner Bonds – even the Treasury press release uses that term – that is not the official name. In fact it appears none exists.
• The minimum age to invest is 65 when the bonds are launched in January.
• No specific launch date has yet been revealed – presumably to limit the risk of a day one website crash.
• The maximum investment is £10,000 per person, per issue, with a minimum of £500. Investments can be made on a joint basis provided both parties satisfy the 65 age requirement. In theory a couple could therefore invest £40,000.
• Interest is added at each anniversary and paid at the end of the term – so these are more like growth bonds rather than income bonds.
• Early encashment is subject to a 90 days’ interest penalty.
• Interest is paid net and, as NS&I are not part of the R85 scheme, non-taxpayers will have to reclaim tax from HMRC. The tax reclaimers will include those who benefit from next tax year’s 0%, £5,000 starting rate band (while it lasts). Higher and additional rate taxpayers will have a tax liability but no corresponding income during the term of the three year bond.
• According to the Budget statement, up to £10bn of bonds will be issued. There has not be any further confirmation of this, but the 2014/15 net financing remit for NS&I was been set with this figure in mind. There are about 11.1m people aged 65 and over in the UK – £900 of bond per head if every one of them invested.
Those eligible to invest in these bonds will also be eligible to make Class 3A contributions (see our earlier Bulletin). However, anyone choosing the three year bond will not get their money back in time to pay class 3A contributions, which have an end date of 5 April 2017. Arguably the Class 3A contributions are a better deal for many retired income-seekers: the contributions will provide a higher monthly income which is (CPI) inflation-proofed and paid without deduction of tax. But, of course, there is no capital return on death.
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