Act now: One year Pensioner Bonds maturing now but rates halved
Officially known as the One year 65+ Guaranteed Growth Bond, the product offered a market leading rate of 2.8% for savers who opened accounts between 15 January and 15 May 2015.
The product flew off the shelf with nearly half a million older savers taking advantage of the generous government-backed bonds.
But in December, NS&I, the government’s savings arm, revealed the re-investing rates at 1.45% for a one-year term, 1.7% for a two-year, 1.9% for a three-year and 2.55% for a five-year.
These rates are much lower than the current best buys, says Anna Bowes, director of Savingschampion.co.uk, and Danny Cox, chartered financial planner at Hargreaves Lansdown warns savers whose bonds have rolled over will suffer a 90 day interest penalty should they subsequently cash in and they could get back less than they invested.
Time to switch
Bowes of Savings Champion said while NS&I’s move was disappointing, it was “not wholly unexpected”.
She says: “We would urge savers to move their funds – not simply roll the money over. By doing nothing, the extra interest earned by taking advantage of the competitive rates on offer earlier in the year, will be eroded by the poor rates being offered on maturity.”
These are the top paying bonds, ISAs, current accounts and savings accounts, according to Savings Champion, in comparison to the rates offered by NS&I:
NS&I 1 Year Guaranteed Growth Bond = 1.45% gross/AER
RCI Bank 1 Year Fixed Term Savings account – 2.06% gross/AER (protected by the French-equivalent of the UK’s FSCS)
Al Rayan Bank (Sharia compliant) 12 Month Fixed Term Deposit – expected profit rate 1.90%
Virgin Money Fixed Rate one-year Cash E-ISA – 1.65% gross/AER
NS&I 2 Year Guaranteed Growth Bond (Issue 51) = 1.70% gross/AER
Al Rayan Bank (Sharia compliant) 24 Month Fixed Term Deposit – expected profit rate 2.78%
State Bank of India Two Year Online Cash ISA Fixed Deposit Account – 2% AER gross
NS&I 3 Year Guaranteed Growth Bond (Issue 51) = 1.90% gross/AER
RCI Bank 3 Year Fixed Term Savings account – 2.70% gross/AER (protected by the French-equivalent of the UK’s FSCS)
United Bank Limited 3 Year Fixed rate cash ISA – 2.30% gross/AER
NS&I 5 Year Guaranteed Growth Bond (Issue 47) = 2.55% gross/AER
United Bank Limited 5 Year Fixed rate cash ISA – 2.55% gross/AER
United Bank Limited 5 Year Fixed Term Deposit – 3.04% gross/AER
Cox of Hargreaves Lansdown says savers could look to open the NS&I five year Guaranteed Growth Bond: “NS&I allow withdrawals from fixed term bonds early, but subject to a 90 day interest charge. This means you could opt for a 5 year bond, cash in after one year and receive a higher interest than the one year version, with the 90 day penalty reducing the interest rate from 2.55% to 1.92% before any tax.”
Easy access savings account
RCI Bank Freedom Savings Account – 1.65% gross/AER
Easy access Cash ISA (no penalty for withdrawing money)
Coventry Building Society – The Easy Access ISA – 1.5% AER variable
Santander 1|2|3 Current Account – 3% AER variable on balances between £3,000 and £20,000 as long as you pay in £500/month and have two direct debits set up, though there’s a £5/month fee.
Reinvest for the longer term and boost yield by 45%
Cox says: “Those who don’t need access to their money and are considering a five year bond should consider taking more risk and investing in the stock market. An equity income fund such as Threadneedle UK Equity Income within a stocks and shares ISA is currently yielding a tax free return of 3.71%, which is 45% higher than the 2.55% offered in interest by the five year NS&I bond.
“There is risk to both capital and income. However over a five year period investors should see a positive capital return and the yield can either by withdrawn as income or reinvested to boost the capital.”
Tax on savings bonds changing from April
For bonds maturing before the end of this tax year, basic rate tax at 20% will be deducted from the interest at source says Cox. Someone who invested the maximum of £10,000 will have £224 interest, a total of £10,224 to rollover, reinvest or cash in.
Higher rate taxpayers will be subject to a further 20% tax (£56) on the interest, declared through self-assessment, and additional rate taxpayers a further 25% (£70) income tax.
Bonds maturing on 6 April 2016 and onwards should receive their interest gross, since all cash deposits and fixed term bonds will pay interest without tax deduction from that point and could be tax free if within the new personal savings allowance.
New Personal Savings Allowance (from 6th April 2016)
If the interest on maturing bonds, when added to all other savings interest (including corporate bonds, gilts, P2P interest), is less than £1,000 then basic rate taxpayers will have no tax to pay. The limit for tax free interest is £500 for higher rate taxpayers and zero for additional rate taxpayers.