Details have been announced of the new National Savings Pensioner Bonds, which are designed to appease pensioners suffering from on-going low rates of interest on their savings.
The Bonds will be available to over-65 year olds in January 2015 and will offer ‘market-leading’ interest rates of 4% a year over three years and 2.8% over one year, subject in each case to deduction of 20% tax at source.
Pensioners will be able to invest from £500 to £10,000 in each type of bond. Withdrawals can be made at any time on 90 days’ notice but no interest will accrue during this notice period.
Such attractive interest rates mean that the Bonds are likely to sell out quickly. However, there is a catch. Although interest payments will not be made until the end of the investment term, tax will be due annually, so investors will be paying tax on money they have not yet received.
Higher-rate taxpayers will be required to declare the interest which accrues on their self-assessment tax returns and may consider that the tax-free benefits of cash ISAs provide a more attractive alternative. Some cash ISAs offer a return which approaches that on a one-year Pensioner Bond.