Three-year Pensioner Bond holder? Why it matters when you opened it
Pensioner Bonds were launched on 15 January 2015 by NS&I – the government’s saving arm. They paid market-leading rates of 2.8% on the one-year fixed-term offering and 4% for the three-year fixed-term product on deposits between £500 and £10,000.
These rates were far above those offered elsewhere but they were only available to people aged 65+. Initially, just £10bn was allocated for the scheme – enough for 500,000 savers. Given their popularity, the availability period was extended to 15 May 2015. See YourMoney.com’s Pensioner Bonds guide for more information.
In total, savers were given four months to open the government-backed products and while the first batch of three-year bonds are due to mature on 15 January 2018, the date at which you opened them is significant in terms of the interest you can expect to receive.
This is because of the introduction of the Personal Savings Allowance a year later on 6 April 2016.
Impact of the Personal Savings Allowance
The Personal Savings Allowance (PSA) is a government measure aimed at reducing the amount of tax people pay on their savings income earned in banks, building societies, NS&I products, company bonds and credit unions. At the time of its launch, the government said it would take approximately 95% of the UK population out of paying tax on savings.
However, the rules vary depending on how much tax you usually pay:
- Basic rate taxpayers (20%): you can earn up to £1,000 of savings income without any tax being due
- Higher rate taxpayers (40%): you can earn up to £500 of savings income without any tax being due
- Additional rate taxpayers (45%): those who earn above £150,000 aren’t eligible for the PSA.
What has this got to do with Pensioner Bonds?
Initially when the 65+ Guaranteed Growth Bonds – to give them their official name – were launched, savers were told that the interest would be taxed at their marginal rate so NS&I added the interest net of tax.
However, as this is a three-year savings bond, and interest is added annually and compounded, the anniversary date is significant.
It means for anyone who opened a three-year Pensioner Bond between 15 January and 5 April 2015, you’ll receive less interest than someone who opened the product between 6 April and 15 May 2015.
NS&I explained that for those who bought the three-year bond between 15 January 2015 and 5 April 2015, the interest is added at the first year anniversary and it will be added net of basic rate tax. For a £10,000 bond, instead of receiving £400 interest, a basic rate taxpayer would actually receive £320.
However, for subsequent anniversaries, interest (compound) is applied gross because of the new PSA tax rules. This means that for anyone who bought the three-year bond between 6 April and 15 May 2015, every year the interest will be added gross as the first and subsequent anniversaries occurred after the new rules came into effect.
The calculations below illustrate the difference (source: Savings Champion, click to enlarge):
Anna Bowes, director of Savings Champion, says for anyone opening the three-year Pensioner Bond pre 6 April 2015, the total interest earned is as follows:
- Basic rate taxpayer – £1,162.11
- Higher rate taxpayer – £1,082.11
- Additional rate taxpayer – £683.16.
For those who opened the product on or after 6 April 2015, the interest earned is as follows:
- Basic rate taxpayer – £1,248.64
- Higher rate taxpayer – £1,248.64
- Additional rate taxpayer – £686.75.
More than 885,000 savers invested over £8.9bn in the three-year Pensioner Bond.
If you invested the maximum £10,000 over the three-year period and you paid no tax, at maturity you would have a total of £11,248.64 (£1,248.64 interest earned).
While the introduction of the PSA means that NS&I pays the interest gross rather than net, if you had earned more interest than the £1,000 or £500 allowance, you should have still paid tax at your marginal rate on anything earned above these amounts. See YourMoney.com’s Fixed term savings accounts risk surprise tax bill for more information.
Your tax code should have been adjusted or you should have contacted HMRC to let it know you exceeded the PSA. Otherwise, you will need to submit a tax return declaring interest earned.
NS&I confirms that all savers who have the three-year 65+ Guaranteed Growth Bond will be sent a printed pack 30 days before the investment maturity term to explain the options available. It adds that you don’t need to take any action until then and further details will also be available on the NS&I website.