When National Savings & Investments (NS&I) launched its 65+ Guaranteed Growth Bonds, commonly referred to as pensioner bonds, at the start of 2015 the products flew off the shelves as savers over the age of 65 piled in to exploit the highly attractive interest rates relative to cash. The one year bonds offered an interest rate of 2.8 per cent and the three year bonds 4 per cent, and you were able to invest between £500 and £10,000 in each of the two types, meaning couples both fully using their allowances could between them have put in £40,000. The products were no longer available after the 15 May so the one year bonds will mature between 15 January and 15 May 2016.
However, the default option for one-year bond holders is to be rolled into NS&I's one year Guaranteed Growth Bond which pays an interest rate of 1.45 per cent – just over half the 2.8 per cent interest rate on the 65+ Guaranteed Growth Bonds.
"While it is accepted that there were no guarantees that further tranches of the bond would be available at the same or similar rate, we anticipate a number of bondholders will be disappointed that the rate is almost halved for new one year bonds," says Patrick Connolly, certified financial planner at Chase de Vere.
For investors unhappy with this, there are two other options: roll over into two, three or five year NS&I Guaranteed Growth Bonds which offer better levels of interest, or cash in their 65+ Guaranteed Growth Bonds and invest elsewhere.
Interest rates on N&SI Guaranteed Growth Bonds
| Term | Interest rate gross/AER (%) |
| 1 year | 1.45 |
| 2 year | 1.7 |
| 3 year | 1.9 |
| 5 year | 2.55 |
Source: NS&I
If you cash in a Guaranteed Growth Bond early you will incur a penalty from the payment equivalent to 90 days' interest on the amount cashed in. When you cash in part of a Bond, at least £500 must remain in the Bond to keep it open. You cannot top up or increase your original sum as Guaranteed Growth Bonds are only available to NS&I customers with maturing bonds – new customers cannot access these. These bonds earn interest at rates fixed for their term at the rates set out above.
Mr Connolly says the rate on the one year bonds must be viewed in the context of high-street interest rates. "Accordingly we consider that a one year at 1.45 per cent will still appeal to many," he adds.
The 1.45 per cent rate is better than many instant-access accounts, although ICICI Bank's HiSAVE SuperSaver Savings Account Issue 1 and RCI Bank's Freedom Savings Account were offering a rate of 1.65 per cent at time of writing, according to Moneyfacts.co.uk. These are only available online.
But if you are prepared to lock up your money for one year as you would with an NS&I Guaranteed Growth Bond, you could get a better rate on a number of products. And the maximum limit you can put in is not capped at whatever you held in your 65+ Guaranteed Growth Bond.
Top interest rates on one year fixed rate bonds from private providers
| Provider | Interest rate (%) | Minimum initial deposit (£) | Maximum deposit (£) | FSCS cover |
| FirstSave | 2.12 | 1000 | 2m | Yes |
| Milestone Savings | 2.1 | 10,000 | 1m | Yes |
| RCI Bank | 2.06 | 1000 | 1m | No |
| Shawbrook | 2.05 | 1000 | 2m | Yes |
| Harrods Bank | 2.05 | 20,000 | 2.5m | Yes |
| Aldermore | 2 | 1000 | 1m | Yes |
| Fidor Bank | 2 | 100 | 100,000 | No |
Source: Moneyfacts.co.uk as at 22 December 2015
However, Danny Cox, chartered financial planner at Hargreaves Lansdown, says that you need to consider how much you value the security offered by NS&I products against those with better rates offered by other providers. NS&I is an executive agency of the Chancellor of the Exchequer, so everything invested with the organisation is effectively lent to the government. For you not to get back your money the UK government would have to default – something considered to be very unlikely.
If private providers are regulated banks operating in the UK and covered by the Financial Services Compensation Scheme (FSCS), and go into default, from 1 January 2016 you can receive up to £75,000 per person per company. This is a reduction from the level where it has been for the past few years of £85,000 but still more than enough to cover the maximum £20,000 plus interest an individual might have in a one year 65+ Guaranteed Growth Bond.
If you did have to resort to the FSCS it is likely that you would not get your compensation immediately though – the process could take some time.
ICICI Bank UK is covered by the FSCS. RCI Bank is not – it operates in the UK under the European Economic Area passport scheme and the first €100,000 (or sterling equivalent) per person, per banking licence, is protected by French deposit compensation scheme.
Stay flexible
You get a better rate on the two-, three- and five-year Guaranteed Growth Bonds but advisers generally don't suggest locking up your money for long periods at the moment, because UK interest rates are expected to start rising in the year ahead. The rates on two- and three-year NS&I Guaranteed Growth Bonds are also well below what you could get from banks and building societies on bonds of the same length of term.
Some advisers argue that flexibility is wise, while Gary Smith, consultant at Tilney Bestinvest, says: "I would be reluctant to lock in at a fixed rate over three and five years because interest rates are likely to go up in that period, although one year is acceptable."
He says rates on these longer term products could go up quite quickly once interest rates start to rise, and points out that you can get a one year bond from a private provider with an interest rate higher than the two and three year rates on NS&I Guaranteed Growth Bonds.
He says savers who already hold three year 65+ Guaranteed Growth Bonds in particular should hold off locking up more of their cash for longer periods.
Mr Cox adds that if you are a longer-term investor who does not need instant access to the money, and want a better rate of return, you could consider if you can take on more risk , for example, from equity-focused investments such as funds. Whether you do this will depend on your plans for the money, for example.
| How to proceed If you opt to rollover all of your 65+ Guaranteed Growth Bond you do not need to do anything – NS&I will automatically reinvest it for you. If you cash in some or all of your 65+ Guaranteed Growth Bond you need to inform NS&I by filling in a form you should have in your product pack, or online at www.nsandi.com. If your name, address or bank details have changed you will also have to update these, and NS&I needs your instructions no later than two working days before your 65+ Guaranteed Growth Bond matures. If you opt to roll into a two-, three- or five-year Guaranteed Growth Bond you also need to inform NS&I via a form in your product pack or online at www.nsandi.com, no later than two working days before your 65+ Guaranteed Growth Bond matures. If you reinvest just part of your original investment the minimum amount you can put into each of the one, two, three or five year Guaranteed Growth Bonds is £500. You need to say on your form how much you want to reinvest and cash in. |
Tax changes
If your bond matures before the end of the 2015-16 tax year, basic rate tax will be deducted from the interest before you receive it. If you had invested £10,000 you would have earned £224 interest - £280 gross minus £56 tax. Basic rate tax payers have no more tax to pay on the interest though if HM Revenue & Customs (HMRC) ask you to complete a tax return you should still declare the interest.
Higher rate taxpayers are subject to a further 20 per cent tax on the interest (£56) declared through self-assessment, and additional rate taxpayers a further 25 per cent (£70).
Non taxpayers can apply to HMRC for a refund, and you can also get one if you're entitled to have any of your interest taxed at the 0 per cent rate for savings income which started in April 2015.
But bonds maturing from 6 April 2016 will receive their interest gross as all cash deposits and fixed term bonds will pay interest without tax deduction, and savers will benefit from the personal savings allowance. If the interest on maturing bonds, when added to all other savings interest, is less than £1,000 then basic rate taxpayers will have no tax to pay. 'Savings' include assets such as cash, corporate bonds, UK government bonds and interest earned on peer to peer loans.
The limit for tax free interest is £500 for higher rate taxpayers and zero for non-taxpayers. "A higher rate taxpayer with savings interest of no more than £500 will pay 40 per cent tax on the interest if the bond matures in this tax year, but zero tax if it matures on or after 6 April," explains Mr Cox.
