Information about the pensioner bonds that was announced back in March in the Chancellor’s Budget and what everyone has waited to hear has finally been revealed by the Government. Pensioner bonds are specifically intended to help people who have retired and have cash savings affected by cuts in interest rates over a period of years.
With a Government-backed bond with National Savings & Investments, there is an opportunity for retirees who want to save over a period of one with a fixed interest rate of 2.8% or three years at 4%.
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To participate in this bond program, there is a minimum of £500 and a maximum of £10,000 per person and per bond. This means together a couple could invest £40,000 when choosing both types of bonds.
These Government-backed bonds are specifically for individuals over 65 years of age who invest cash savings and want risk-free and inflation-beating returns over a short to medium period. One person can open an account or it can be opened in the couple’s joint names.
There are many retirees excited for the chance to invest money into the new pensioner bonds, which as of next year go on sale. This will allow them to receive a small but genuine return after tax, above inflation, and with virtually no risk, according to retired grandparents, John age 79 and Pat age 76. Each is thinking about putting the maximum amount of money into the program but for just one type of bond.
As John stated, he and his wife have some retirement money in fixed-term cash investments which annually, mature. Therefore, it makes perfect sense to consider these new pensioner bonds as a place for that cash to reside.
Starting next months, the bonds will go on sale and continue until no more are available. In addition, overall there is a limit on the mount that people interested in saving can put in the bonds which is as much as £10 billion. That means one million retirees have the ability to invest £10,000 each in a single bond.
These Government-backed bonds are expected to be extremely popular and will be sold on the basis of “first come, first served”. For anyone who qualifies and wants to buy bonds, they can go to the National Savings & Investments’ website at nsandi.com or if preferred, they can call at 0500 500 000 or write to the organization at National Savings and Investments, Glasgow G58 1SB.
There are pros and cons of these bonds as indicated by Jonothan McColgan, chartered financial planner with Combined Financial Strategies in Bath. Annually, interest accrues and for the three-year bond, interested is compounded so ultimately, there is an earning of interest on interest.
Another huge benefit to purchasing one of these bonds is that the Treasury provides 100% backing. Also, it is possible to gain early access to the money but in this case, there is a loss of 90 days interest. In the event the bondholder passes away, a beneficiary who is also 65 years of age or older can inherit but also the bond can be retained.
One of the downfalls of these bonds is that interest is not paid until the date of maturity. Because of this, they would not be a good fit for someone who wants a regular income stream. Another consideration is that there is a deduction of $.20, which means that people who do not pay taxes have to reclaim overpaid tax from HM Revenue & Customs. On the other hand, taxpayers who pay a higher rate are required to declare the interest every year on a tax return for self-assessment.
Independent Financial Advisor Scott Whittle with Chase de Vere stated that if savers were allowed to withdraw regular income, pensioner bonds would be even more attractive.
In addition to these bonds, there are other options available for fix-rated deals. One is the five-year bond offered by Clydesdale Bank. These bonds are available in £2,000 and £5,000, which pays 3%. Another possibility is offered from First Save, which is a one-year bond that has a minimum deposit of £1,000 and a maximum of £2 million paying 1.85%.
Keep in mind that deposits up to £85,000 has Financial Services Compensation Scheme protection.