Originally announced during The Chancellor’s Budget speech in March 2014, January 2015 will finally see the launch of the new so-called ‘pensioner bonds’. The rates for the bonds, announced only recently, will see them leading the bond marketplace, with the one-year bond offering 2.80% gross/AER and the three-year bond promising 4.00% gross/AER.
The bond’s informal title comes from the fact that they will only be available for people over 65 years of age, giving retirees a unique opportunity should they decide to invest. The government has limited the bond issue to a total of £1 billion, with individuals able to purchase a maximum of £10,000 per term. Given that the bonds allow joint investments, a couple could place as much as £40,000 in total into the scheme. The government expects around one million pensioners to invest in the bonds.
Though income from the bonds is subject to taxation, the returns from the bonds presents a very reasonable option when compared to other savings alternatives. At the time of writing, Cash ISA rates are still very low, with the best deals on the market offering interest of around 1.75% for a one-year investment and 2.15% for a three-year account. A sizeable investment of £10,000 in the three-year pensioner bond would return £1,248 gross at the end of the term, whilst an investment in a comparable three-year deal (Shawbrook Bank’s three-year bond at 2.5% gross/AER) would return just £769 gross.
The main disadvantage of the new bonds has been highlighted as the fact that the interest is not payable until maturity, meaning that there is no option to use the bonds as a source of regular income. Instead, for most people opting to invest in the bonds, they are likely to provide a risk-free way of saving, providing a small but inflation-beating level of growth over the short-to-medium term. For investors seeking diversification from other higher risk holdings, the bonds also present an attractive option, though the investment limit on an individual level is, relatively speaking, quite low.
There is likely to be high demand for the bonds, given their market-leading rates and guaranteed status and because of that, the bonds are being offered on a ‘first come, first served’ basis only. For those who change their minds after investing, the option does exist to exit the bond early, with only a penalty equivalent to 90 days interest to pay. Access to the bonds will begin, as stated, in January, although the government is keeping its cards close to its chest, with the exact date of sale still yet to be formally announced.