Strength of demand and cash limits will erode impact of attractive NS&I investments, writes Jeff Salway
RETIRED savers are poised to take advantage of the government’s new pensioner bonds when they finally hit the shelves in January – but many will be left disappointed.
The launch of the NS&I bonds was announced in the Budget in March, delivering a boost to long-suffering older savers hit hard by a paucity of inflation-beating cash accounts since 2009. A limit on the amount of money that can be saved in the products means that the offer is likely to be shortlived, however.
The returns on the one-year and three-year bonds will be confirmed early next month and are expected to be set at 2.8 and 4 per cent respectively.
That would put them significantly above the cash rates currently available from high street banks and building societies, said Andrew Hagger, personal finance expert at Moneycomms.co.uk.
“If these rates stand, then they are well ahead of what’s on offer in the wider savings market, where the best one-year rate is 1.8 per cent from the Post Office and the best three-year rate, from Shawbrook Bank, is 2.5 per cent,” he said.
Savers will be able to take out one of each term, allowing them to deposit £20,000 in total. Someone depositing the full £10,000 in a one-year bond paying 2.8 per cent would earn £100 more interest (or £80 if they pay 20 per cent tax) than they can get from the best equivalent account on the high street.
The extra return on a 4 per cent three-year bond, when compared with the current top rate of 2.5 per cent, would be £150 a year (£120 for a 20 per cent taxpayer).
However, the interest will be paid net of basic tax, eroding some of the advantage over tax-free cash Isas (and meaning non-taxpayers will need to go through HM Revenue and Customs to reclaim it).
The interest will also be paid only at maturity, undermining the appeal of the bonds for those wanting monthly or annual income from their savings.
Yet with NS&I imposing a £10 billion funding limit the offer is likely to be quickly oversubscribed. Applications will come not only from those stuck in poor value cash accounts, but also investors wanting to switch some cash out of stock market-based investments into a safer income-generating product.
Paul Lothian, director at Verus Financial Planning in Dundee, said: “Certainly, if they are ‘twice the market rate’ as was suggested, then it will make sense for those with cash and who qualify to take full advantage.”
That demand will be high is indicated by the growing popularity of other alternatives to conventional savings accounts. The handful of current accounts that offer eye-catching in-credit rates have been hugely popular, Lothian said.
“Santander’s 123 current account, which pays 3 per cent on balances between £3,000 and £20,000, has been very successful at attracting depositors, so I can see the pensioner bonds being in high demand if they pay interest at a similar or better rate,” he said.
The success of “peer-to-peer” lenders such as Zopa and RateSetter is instructive too. “It’s no coincidence that the popular peer-to-peer providers are seeing record inflows of money as savers look for alternative ways of eking out a meaningful return from their cash savings,” said Hagger.
There is some hope that the launch of the pensioner bonds will lead to improved competition in the wider savings market as banks and building societies respond to the threat of losing another £10bn in savings cash to NS&I. The government is also raising the holdings threshold for NS&I’s premium bonds in January, from £40,000 to £50,000.
But the appetite among banks and building societies for savings deposits remains minimal, Hagger believes.
“I’m not sure the NS&I bonds will have too much influence on wider savings rates because we’re talking about a maximum of £10,000 per bond,” he said. “If the limit was £50,000 or so then I think there would be more of a response to protect a bigger outflow of credit balances.”
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