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Pensioners Bonds - Rates Announced

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Pensioners Bonds were announced by the Chancellor in his Spring Budget. They will be available in January 2015, via National Savings & Investment (NS&I). It appears that the full Terms and Conditions (T&C) will not be released until January. Meanwhile, I offer the following as a summary of the information now available, subject to possible revision when the full T&C are released.

There will be a 1-year Bond and 3-year Bond. The minimum investment is £500 per Bond and the maximum is £10000 per Bond. A person can invest in either or both Bonds, so the maximum that a person can invest across both Bonds is £20000.

The Bonds will be available for persons aged 65 or over. An investment can be in sole name or in joint names with another person aged 65 or over. The interest rates were announced on Friday, 12th December:

For the 1-year Bond, 2.80% gross Annual Effective Rate (AER).

For the 3-year Bond, 4.00% gross AER.

These are the rates previously indicated by the Chancellor.

The interest rates are fixed for the term. Interest is added on each anniversary and it is paid net of basic rate tax, which means that a non-taxpayer who wants to recover the tax deducted will need to reclaim it from HMRC, while a person liable for tax at more than basic rate will need to declare the interest to HMRC and pay the extra tax due.

NS&I note that each bond is “…designed to be held for whole term, but can be cashed in early with a penalty equivalent to 90 days’ interest.” At first sight, this leads to the conclusion that, in broad terms, a person who can commit up to £10000 for investment of at least a year would be better to invest in the 3-year Bond and cash it after a year, rather than invest in the 1-year Bond. That is because a 3-year Bond minus a 90-day penalty reduces its 4.00% interest to just over 3%, which is more than the 2.80% of the 1-year Bond. I find it hard to believe that the people at HM Treasury haven’t spotted this, so I expect that the T&C will contain a clause to negate it, e.g. tiered interest rates (4% a year for 3 years gets approximately the same result as 1.50% for year 1, then 2.50% for year 2, then 8.13% for year 3).

Again quoting NS&I, “Applications to invest in the Bonds can be made online, by phone or by post once they are on sale during January 2015, the exact date is yet to be announced.”

Current indications are that demand for the Bonds will be high and that they will be withdrawn from sale when £10 billion has been raised.

– Gordon Lynes,  Independent Financial Adviser with SWLaw Investment & Financial Planning Ltd

Reference:

HMRC  Capital gains tax: denying entrepreneurs’ relief for disposals of goodwill to related companies

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