Generous Pensioner Bonds rates confirmed before their release in January ñ A look at what weíre in for

The State-owned National Savings and Investments (NS&I) will flood the market come January with pensioner bonds offering unparalleled interest rates, according to the Treasury.

Pensioners will be given access to two bonds: a one-year bond paying out a rate of 2.8% and a three-year bond yielding an ample rate of 4%.

With a maximum of £10,000 allowed to be invested by an individual in each of the two bonds, couples could feasibly pour £40,000 into the bonds with all the bondsí returns going to a surviving spouse in the case of a partnerís passing.

Though thoroughly cost-effective, the bondís interest rates will not come as a surprise to many as they are largely in line with peopleís expectations following the bondsí announcement in George Osborneís budget last March.

The Chancellor promised a radical overhaul on pensions focussed on providing people aged 65+ with the value they deserve after a lifetime of diligent saving. Pensioners have lost out substantially from the central bankís decision to keep the base rate at its record low of 0.5%, seeing their savings accruing marginal gains compared with past generations.

As such, demand for the new pensioner bonds is expected to be considerable when they are rolled out next month, especially when the comparable bonds on offer from banks and building society are contemplated.

The best value one year, tax-free pensioner bond on offer comes from the Islamic Bank of Britain at 1.90% whilst the same bankís bond attached with a 20% tax on interest comes in at a meagre, yet market-leading, rate of 1.52%. The top 3-year pensioner bond on the market comes from Secure Trust paying 2.51% tax-free and  2.01% with 20% tax. 
None of the ëbig 6í high street banks come anywhere near the top of the best buy list regarding pensioner bonds.

Pensioner bonds will be available from NS&I via post, phone or online and have been received warmly by the masses of over 65s desperate for a better level of financial security for their retirements.

However, savers are encouraged to act with speed as the Treasury has stated only £10bn worth of bonds will be available for purchase, and the level of demand could outweigh the number of products on offer. There is no way of pre-ordering so over 65s are instructed to keep on their toes; if  the maximum was invested by each individual saver, only 500,000 people would be able to get hold of both bonds.

Interest will not be accumulated on a monthly basis, to the chagrin of many people, rather it will be accrued on a yearly basis. The lack of flexibility this naturally means savers must endure regarding their spending exploits will be frowned upon, as supplementary boosts ñ even of £20-30 – to one who is not earningís income month-month would breed less worry about household monthly outgoings.

Scott Whittle, financial adviser with Chase de Vere, adds: ëPensioner Bonds would be even more useful if they allowed savers to take a regular income.í

Another snag is that anyone seeking to cash in early will have to pay a fee equal to 90 days interest on the exact total withdrawn. It is very much the case that if over 65s have money invested in tax-free cash ISAs, they should consider not withdrawing for a 3 year interest splurge, as the ISA has a good chance of yielding higher returns in the long term.

George Osborne said: ìA key part of our long term economic plan is to support savers and boost hardworking peopleís financial security at all stages of life.

ìThatís why the government is introducing savings bonds for people aged 65 and over, and why weíre confirming today that these bonds will pay the best available interest rates. They will give hundreds of thousands of older savers the certainty and comfort of a good return over the life of their investment.î

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