The governmentís hotly-anticipated pensioner bonds are being launched next January, sparking hopes for higher returns than savers are accustomed to from their bank or building societyís rock-bottom interest rates.
Announced in the Chancellorís budget earlier this year, the Coalition have hyped the ëPlus 65 bondsí as a cornerstone measure in their pensions overhaul, with George Osborne stating that over-65s ought to ìbe free to choose what they do with their moneyî.
The bonds are hoped to top-up pensionersí incomes, giving them greater financial stability in their old age, and set to go on the National Savings & Insurance Market (NS&I) they are expected to sell out in their entirety.
However, elderly folk will not welcome the news that these bonds will not be pay out monthly income, somewhat sullying the attractiveness of the rates which accompany them.
Julian Hynd, NS&Iís retail director, says: ëInterest on the new bonds will be added on each anniversary, rather than monthly. This is because the monthly income on a £10,000 investment would be relatively low at around £20 a month on a one-year bond.í
Retirees and those fast approaching pensionable age have undergone a tumultuous period since the start of the financial crisis, and it was thought these bonds would help alleviate some of the financial pain and uncertainty they have suffered in the years since by at least allowing savers to see a monthly boost to their cash-flow.
However, this is not to be the case, not that this development will diminish the popularity of the Plus 65 bonds, with billions of pensionersí pounds primed to be transferred into them.
Patrick Connolly, of independent financial advisers Chase de Vere, says: ëThis is massively disappointing. Pensioners are crying out for monthly income and they canít find a decent return without taking a risk.
ëThese new bonds were supposed to address this problem. NS&I should look to pay a slightly lower rate and pay monthly income.í
Any saver seeking to purchase a 1-year bond will have to wait 12 months before seeing any interest returns on their investment, whilst those in the market for the 3-year bond package will be sitting tight until 2018.
Even when the term comes to an end, and over 65s become eligible for their interest returns, they will have to claim back an obligatory 20% income tax deduction from Her Majestyís Revenue & Customs (HMRC) despite not having to pay tax. The convolution inherent in this red-taped up process is just another negative of an investment opportunity which sounded so promising at first.
All of this does not make pretty reading as far as elderly folk short of disposable income are concerned, who can be forgiven for buying into Mr. Osborneís honeyed words given just how low banks and building societiesí rates of interests are at present.
With an interest rate hike in the offing, borrowers are unwilling to take out loans which might blow up in their face when the emergency rate is finally brought up by the Bank of England, yielding higher repayment costs.
Moreover, critics of the Funding for Lending scheme lambast it as having disincentivized lenders from the allure of saversí funds due to the state-provided ëcheap moneyí acquired as part of the scheme. When the base rate rises, any interest rate hike from banks and building societies will most probably be inconsequential as far as savers are concerned, further highlighting the need for a competitive injection into the banking sector.
Osborne has stated that no more than 10 million bonds will be put on the market by the NS&I and no more than £10,000 can be invested in each bond.
The rates on plus 65 bonds will ensure they sell out, with the Chancellor expected to reveal them in his Autumn Statement. They are projected to be 2.24% and 3.2% – post-tax ñ on the one year bond and three year deal respectively. This is practically twice as high as the meagre interest rates offered by banks & building societies.
Pre-financial crisis, Britainís most popular banks provided unthinkable rates, as far as present day perspective is concerned, of up to 5.47% post tax per annum. These have dropped to below 1.25% in many cases, however many lenders still allow their savers on fixed-rate deals to take their income in on a monthly basis.
With so much being made over the financial security and comfort of elderly folk as they seek to wind down from the pressures of working lives, government ought to follow through on their promises and account for the extra disposable income so many people of pensionable age so strongly deserve.
The Chancellorís Autumn Statement will be made on December 3rd.
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