Cash or money held on deposit forms an important part of personal financial planning. Typically we would expect to see around six months of living expenses in the bank for emergencies. Many people will hold more than this, with cash acting as an important security blanket particularly when the ability to be able to add to savings has passed, i.e. retired clients.

As has been well documented, returns on money held on deposit are poor compared to historical levels; you would be doing well if you could get a return of around 1.4% gross (AER) on an easy access account. Even if you were to wrap your cash in a savings friendly ISA, notice account, 1.8% (AER) would currently be about the best deal on offer.

From January 2015, new fixed rate bonds exclusively for investors aged 65 and over, the so called “Pensioner Bonds”, will be made available through National Savings & Investments (NS&I). These fixed rate bonds will allow an inflow of money expected to be in the region of £10 billion; as is often the case once this limit has been reached the offering is expected to be withdrawn. It is anticipated that demand will be such that the £10 billion allocation to the bonds will be filled in weeks rather than months.

Rates, compared to what is currently available through cash deposits are attractive. The one year bond will offer a rate of return of 2.8% gross (AER); with the three year option offering a return of 4% gross (AER). Interest is added on each anniversary. The minimum saving is £500, the maximum being £10,000. So for couples both over the age of 65, a total of £40,000 can be squirrelled away into the fixed rate bonds. The bonds can be encashed early but a penalty will apply which will be the equivalent of 90 days interest.

Interest is taxable with basic rate income tax being deducted prior to settlement. Higher and additional rate tax payers will need to settle their additional income tax liability with HMRC. Non tax payers will need to liaise with HMRC to reclaim the tax. Unfortunately, the bonds do not operate under the R85 scheme which many non tax payers will be familiar with through their usual deposit accounts.

You can apply for the fixed rate bonds on-line, by phone or by post. As competition for the bonds is expected to be fierce applying on-line or by phone would seem to be preferable. It is anticipated that through applying on-line you should receive confirmation almost instantaneously if you have been successful with your application. In an attempt to avoid disappointment registering with NS&I to receive their e-mail alerts will give you a head start in applying for the bonds as and when they become available in January. Having the funds available in some form of penalty free instant access account would also seem to make sense.

Through investing via NS&I your income will be as secure as you can hope; in fact, the NS&I website states “All the money you save or invest with NS&I will be 100% secure, as we are backed by HM Treasury…”

In our view allocating a tranche of your funds on deposit to the fixed rate bonds makes good financial planning sense. However, you’ll need to remain alert to ensure that you don’t miss out.

Notes

  • AER – annual equivalent rate, a notional rate that illustrates what the annual rate of interest would be if the interest was compounded each time it was paid.
  • NS&I phone number: 0500 500 000
  • NS&I website address: nsandi.com
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