Interest rates for the new ‘Pensioner Bonds’ have been announced and they offer some cheer for those over 65 ahead of Christmas.
Originally announced in the Budget in March, the one-year pensioner bond from National Savings & Investments will pay an annual interest rate of 2.8%, and the three-year pensioner bonds will pay interest at 4%.
These are the rates originally predicted in March, despite market interest rates falling since then.
The pensioner bonds are due to be launched in January.
Only those age 65 and over will be eligible to access these pensioner bonds and they will have a maximum limit of £10,000 in each bond, so each person over 65 can save up to £20,000 across the two bonds.
There is a minimum investment of £500.
If you invest the maximum in the one-year pensioner bond, you would receive interest before tax of £280.
Investing the maximum £10,000 in the three-year bond would result in interest of £1,248 over the three years.
Both pensioner bonds will however be taxable, so income tax will reduce the net interest received. We understand it will not be possible to hold the new pensioner bonds within an Individual Savings Account (ISA).
Basic rate income tax of 20% will be deducted at source, so non-taxpayers will need to reclaim this tax (using form R40) and higher rate taxpayers will have additional income tax to pay on the interest.
National Savings & Investments are not currently a part of the R85 scheme, so there is no option to elect to have the interest from pensioner bonds paid gross to non-income taxpayers.
Because HM Treasury is limiting the total subscription to these pensioner bonds to £10bn for the first issue, and because the interest rates are significantly better than market rates, we expect the first issue in January to be oversubscribed.
Many savers are expected to miss out on this ‘first come, first served’ pensioner bond savings opportunity.
