The way the government is handling applications is being criticised as older savers struggle to obtain decent returns, writes Jeff Salway
THE search for income will go on for many older investors as huge demand for the government’s new Pensioner Bonds means thousands will miss out on the product.
Plans for the NS&I 65+ Guaranteed Growth Bonds were set out in the Budget last March and the rates were published in December. They finally became available on Thursday, when the initial surge of demand crashed the NS&I website and jammed its phone lines.
The products, restricted to people aged 65-plus, are available over one and three-year terms, paying 2.8 and 4 per cent a year respectively.
The maximum investment is £10,000 and savers will be able to take out one of each term, allowing them to deposit £20,000 in total.
But with a total funding limit of £10 billion the bonds are likely to sell out rapidly, said Sylvia Waycot, editor at Moneyfacts.co.uk.
“If you want the chance to get hold of one, then waste no time in applying. Disregard any notion of postal applications and don’t get stuck in a long phone queue as it really is a case of quickest gets the deal. My advice is to apply online.”
She accused the government of being “sneaky” in the way it launched the bonds.
“Many of the people eligible for the newly launched 65+ Guaranteed Growth Bonds must be feeling pretty miffed by the quietness of the actual launch, which is in stark contrast to the very loud original announcement made by Chancellor George Osborne,” she added.
The returns on the bonds easily outstrip the best deals available in the cash savings market. The average one and three-year fixed rate bonds currently on offer pay 1.43 and 2.03 per cent respectively, according to Moneyfacts.
But while their popularity underlines the sheer demand among pensioners for a low-risk source of income, the bonds are far from the ideal solution.
Perhaps the biggest drawback is that the interest is paid net of basic tax, as they are not eligible for inclusion in Isas.
An additional downside is that because the bonds are not part of the R85 scheme, savers don’t have the option of simply completing a form to stop the tax being paid. Instead those with earnings below the personal allowance and who therefore don’t pay income tax will need to apply directly to HM Revenue & Customs to reclaim tax paid.
The money saved in the bonds is also tied up for the entire term, as the interest will be paid only at maturity and not as a regular income.
The good news, however, is that there are income-producing alternatives to the bonds that don’t necessarily entail a significant risk to capital. With the end of the tax-year approaching, a new raft of cash Isas may be on the market soon.
Richard Wadsworth, financial planner at Carbon Financial in Edinburgh, said: “If you haven’t made use of your Isa allowance you could direct up to £15,000 into an Isa and secure tax-free interest.
“The rates would still be a lot lower than Pensioner Bonds, at around 1.65 per cent over one year and 2.15 per cent over three, but the interest would be tax-free.”
Other cash-based options include the savings deals currently offered along with certain current accounts. The M&S fee-free current account now comes with access to a monthly savings account paying 6 per cent, while First Direct also pays 6 per cent and TSB 5 per cent. All of these come with restrictions, however, such as on the amount paid in each month.
Many savers frustrated by the paucity of cash returns on the high street have turned to “peer-to-peer” lenders such as RateSetter, Zopa and Funding Circle. These firms, which allow people to lend to each other or to businesses in return for interest rates easily outstripping those on ordinary cash accounts, are growing rapidly in popularity and will from April be eligible for inclusion in Isas.
Another way to secure an income above that paid by Pensioner Bonds is to take some extra risk and consider bonds and equities.
“Bonds in the form of loans to companies or governments might provide an income of 4 per cent a year, based on a high-yield sterling bond fund,” said Wadsworth. “However, the capital value would fluctuate over time, and the income yield may well too.”
For those comfortable with raising the risk notch another level, equity-based options provide a level of protection against inflation that cash savings cannot, pointed out Iain Wishart, owner of Wishart Wealth Management in Edinburgh.
“A well-diversified portfolio investing across fixed interest, equities (shares) and, to a lesser extent, commercial property should over the longer term (of five years or more) create more income and offer better inflation protection than deposits,” he said.
“But where access is required and the saver can’t cope with the risk of fluctuating capital, cash is still king.”
Many of the funds popular among yield-seeking investors are in the UK equity income sector, which in November was the biggest-selling investment sector for the sixth successive month.
“If the investor was comfortable taking on some risk, they could consider a fund investing in shares which provides a high level of income,” said Wadsworth.
“This would currently provide approaching a 4 per cent yield, but with the prospect of capital growth as well, albeit there would be a significant amount of risk associated with this.”
Investment trusts can be particularly good for providing a regular income. The Association of Investment Companies reported in 2014 that 35 investment trusts have raised the dividend paid to investors for each of the past ten years.
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