Jeff Salway: A risky business for retired savers

What now for risk-averse savers craving a regular income from their cash? Picture: PA

Retired savers in search of income may have to take more risk with their cash after the withdrawal of pensioner bonds from the savings market.

More than one million savers ploughed some £13 billion into the bonds, which became the biggest-selling UK retail savings product of all time before being taken off the shelves last week.

The NS&I bonds, restricted to people aged 65 and over, were announced in the 2014 Budget and launched in January. The products, which had a minimum investment of £10,000 each, were available over one- and three-year terms, paying 2.8 and 4 per cent a year respectively.

The launch of the bonds was widely considered to be politically motivated and with the election now over there’s little prospect of more being issued.

Iain Wishart, owner of Wishart Wealth Management in Edinburgh, said: “The pensioner bonds provided market leading rates and it proved a vote winning policy in some parts of the UK. But for those with significant cash savings, the NS&I pensioner bonds could only accept a small proportion of wealth in any case.”

There were downsides to the bonds, however. Not only was the interest liable to tax, but income was only paid at maturity and not with the regularity that many retirees desire.

Yet with the rates paid on the bonds significantly above the cash returns available elsewhere, the demand was unprecedented.

So what now for risk-averse savers craving a regular income from their cash?

With interest rates still at 0.5 per cent and highly likely to stay there for at least the rest of 2015, there’s little light at the end of the tunnel for long-suffering cash savers.

“With interest rates at an all-time low, savers who prefer to keep money in cash are enduring the worst period ever in the UK,” said David Gow, director at Acumen Financial Planning.

“The withdrawals of pensioner bonds means retirees should tread carefully and consider all the terms and conditions when accessing other cash accounts.”

The first port of call is tax-free individual savings accounts, into which £15,000 can be deposited during the current tax year. The top variable-rate Isa available now is offered by Al Rayan Bank, at 2.02 per cent (aer), with a 120-day notice period. Al Rayan – formerly Islamic Bank of Britain, and which is covered by the Financial Services Compensation Scheme (FSCS) – also boasts the top one-year fixed Isa, paying 1.9 per cent.

Al Rayan, Aldermore and First Save all offer 1.9 per cent on taxable one-year fixed rate bonds (with minimum deposits of £1,000). Al Rayan and First Save pay 2.32 and 2.15 per cent respectively on their two-year fixed rate bonds.

Even these “best buy” deals are below the one and three-year pensioner bond rates, however.

To get a better income from your cash you may therefore have to take a little risk, said Wishart.

“Cash has never been the place to ‘invest’ if beating inflation is the requirement – nor will it ever be. Low risk equals low return.”

A growing number of savers are turning to “peer-to-peer” lenders. These firms, including Zopa, RateSetter and Funding Circle, allow people to lend to each other or to businesses in return for interest rates significantly above those currently offered by cash accounts. Peer-to-peer lenders have robust protection arrangements, but savers aren’t covered by the FSCS.

Taking additional risk typically entails dipping a toe into bonds and/or equities.

“We recommend that people manage risk and diversify by owning a fund that invests in a diversified spread of shares in the great companies of the world, commercial property and fixed interest (including gilts and corporate bonds),” said Wishart.

There’s always some risk involved in equities, but you can ride out volatility over time if you’re sufficiently diversified and don’t panic, he added.

“When markets correct the main thing is to sit tight. If history tells us one thing about being invested in a well-diversified portfolio, temporary volatility rarely equals a permanent capital loss unless one panics and sells out.”

UK Equity Income funds, especially popular among income seekers, typically aim for a blend of growth and pay a yield of around 3 or 4 per cent. Investment trusts are another option, with 35 having raised the dividend they pay to investors for at least 10 successive years and 15 boasting more than 30 years of dividend payout increases.