Don't panic over NS&I 65+ bonds

The one-year bond pays an annual interest rate of 2.8 per cent before tax, and the three-year bonds pay 4 per cent before tax, better than anything that any bank is offering at the moment. These rates translate to 1.68 per cent and 2.4 per cent for a higher rate taxpayer, respectively.

Investment is limited to £10,000 in each bond, making a maximum of £20,000 per individual.

The bonds had the biggest opening sales of any retail financial product in Britain's modern history, with the NS&I website (www.nsandi.com) running into problems under the weight of demand on the first day of sale. On the first day, NS&I tweeted: “We expect the 65+ Bonds to be on sale for months not weeks and would like to reassure savers that there is no need to rush to invest.”

However, the firm has revealed that it sold £1.1 billion of the £10 billion allocation for the bonds in the first two days on sale. If the bonds carry on selling at this rate they will be sold out in 18 days so will only be available until 1 February.

Calum Bennie, savings expert at Scottish Friendly says: “There is £10 billion set aside for this tranche of bonds, so we are not likely to see it sell out in days. However, there is only a very slim chance that they will still be available by March.”

In 2011, popular NS&I index-linked certificates sold £5 billion in 4 months before being closed but when I asked, the firm said it was unable to reveal how the sales panned out over this period.

Should you buy them?

Danny Cox, chartered financial planner with Hargreaves Lansdown says: “Now that a rise in interest rates looks even less likely this year, these new bonds look even more attractive. The one year in particular is a ‘no brainer’.”

Chris Williams, a certified financial planner and CEO of online investment adviser Wealth Horizon says: “There are so many options out there for retirees who miss out, including building a lower-risk portfolio of different assets which can potentially deliver the income they need in retirement, while also providing them with a chance to make capital gains.”

Alan Steel, chairman of Alan Steel Asset Management says: “As an over 65 year old, with lots of pensioner clients, I’m at a loss as to why they’re all so desperate to pile into these 1 year and 3 year Bonds that only provide the return at the end of the term, even if it is 2.8 per cent for 1yr, and 4 per cent for 3yr, taxable.

“So I remind these older savers that a better more flexible income alternative lies in the range of excellent income funds (or income investment trusts if you prefer). Investors can look forward to an income that rises over the years, typically above cost of living increases. If the fund or investment trust is held inside an Isa it doesn’t incur higher income taxes and avoids capital gains tax, and under new Isa rules you can pass the tax efficiency to your spouse on death.

“I just don’t get the obsession each generation of retirees have with fixed income from any form of deposit. I can’t think over the last 40 yrs as an independent financial adviser when that’s ever worked in their favour. What is it that Warren Buffett says? 'Don’t be part of a crowd jamming up an entrance, go where the crowd’s piling out the exits.' Sound advice, I’d say.”

Mr Steel recommends the M&G Episode Income Fund (GB00B7FSJ224), which seeks to deliver an attractive level of income that grows over time by investing globally in a diverse range of assets.

For more income fund ideas, look at the IC’s Top 100 Funds, where we list 18 UK and overseas income funds.

http://www.investorschronicle.co.uk/funds-and-etfs/top-100-funds/

NS&I 65+ Guaranteed Growth Bonds

PROS:

• Stand-out rates

• Complete security from government-backed bank

CONS:

• The bonds don’t pay regular income.

• Anyone thinking of taking out a pensioner bond by cashing in an existing Isa will lose the tax-free status of their savings.

How the NS&I 65+ bonds compare

Best 1 year bonds

Best 3 year bonds

Source: Table sourced from Moneyfacts.co.uk on 20 January 2014.