Demand for NS&I Saving Bonds a Product of Bad Advice

Posted on January 19, 2015

Last week like many of you I woke up to the news that NS&I are about to launch the new so-called Pensioners Bond. This hardly came as a surprise, Chancellor George Osborn had previously mentioned the launch of the new Pensioner Bond in his latest Autumn Statement.

So what are Pensioner Bonds and why is it the entire issue of one billion pounds is expected to be sold in record time?

Firstly, it is important to note that a pensioner bond is a saving product with an artificially high interest rate, this headline rate is set at 4% with a tie in for a 3 years or a more modest offering of 2.8% for a year.

Theoretically a couple could invest up to £40,000 if they were to maximise their £10,000 holding in both of the terms.

On the face of it this seems like a great offering, the UK is in a temporary period of low inflation and the UK is about to enter a period where earnings will pass inflation. So a 4% a year gross return looks very attractive indeed.

Not so quick though! The new savings bonds are only available to individuals over 65, they are restricted to £10,000 per person per term and they are not available within an ISA.

This is a particular problem for tax payers. A basic rate tax payer would only get 3.2% per year and a higher rate tax payer only 2.4% per year. While the headline rate of 4% looks very attractive indeed anyone paying tax should still want to consider a cash ISA a priority.

In line with most Financial Advisers, we would recommend that our clients utilise their ISA allowance whether it be for stocks and shares or cash every year as a matter of priority. For a tax payer not only are the cash savings rates competitive with the NS&I pensioner bond but also they offer other benefits.

Given the choice between a pensioners bond and utilising your ISA allowance 9 out of 10 times the ISA allowance will be more appropriate, this is particularly true for complex financial individuals and individuals who have got a set objective in mind.

The changes in legislation affecting ISA’s allow individuals not only to hold stocks, shares and cash in a tax efficient manner, but they also allow the transfer from stocks and shares into cash, previously not this was not possible.

Also ISAs can now hold BPR qualifying assets (important for inheritance tax planning) and can be passed between couples on the event of the first death.

Importantly if an individual was to utilise their £15,000 ISA allowance for cash each year it would allow an individual a lot more flexibility in their future financial planning.

For example a married couple who accumulated over 3 years £90,000 of cash ISA’s could convert these cash ISA’s into BPR qualifying AIM shares to help mitigate any Inheritance tax problem.
Another scenario may be the production of income, after the 3 years you could transfer your cash ISA’s into income producing assets in order to draw money to supplement pensions upon retirement for example.

The point being ISA’s allow individuals tremendous flexibility when planning their financial future and establishing financial goals.

It is also worth noting that the NS&I product (if you are lucky enough to get one) is fixed over three years.

At the moment in the low inflation environment this is very attractive. However, other economic factors also need to be taken into consideration. Our historically low Bank of England base rates could change over three years.

This is no way farfetched, the UK is currently experiencing economic growth and should this continue it would be no surprise to see interest rates rise. Not only would inflation start to creep up, so would cash ISA rates.

An individual locked into a 2.4% annual return from a pensioner bond for 3 years, may also find out that this is not quite the deal that they expected, an even more bitter pill may need to be swallowed once they realise that there is an interest penalty to move money to a more competitive cash ISA.

So why is there so much excitement over a 4%, 3 year fixed bond which can’t be ISA wrapped or tax protected?

My opinion is a lack of consumer education around financial planning, this is compounded by negative press surrounding financial institutions, thereby fuelling public apathy.

IFA’s need to be held accountable, particularly those in the past responsible for selling such products as with-profit funds and structured investments. Not to mention those with an obsession with promoting Fund Managers who charge too much and produce too little.

Many clients who need volatility within their portfolio to reach their financial objectives are put off due to their past dealings.

Unfortunately this leaves savers scratching around for the best rates in products simply not suitable for their needs, it has also fuelled the hysteria for pensioner bonds.

So Where Does This Leave The Pensioner Bond?

The Pensioner Bond will be ideal for certain individuals. A non-tax payer with investable wealth of between £10,000 - £30,000 and only wishing to beat inflation could not ask for a better product.

However they should not be viewed as a replacement for cash ISA’s and I think it is wrong to see them as a replacement, particularly if you have a certain Income or Tax strategy in mind.

If you wish to speak to anyone in the Pearson’s Financial Planning team and find out if Pensioner Bonds are right for you, please call 0161 785 3500 or email me jonathan.beardmore@pearsonlegal.co.uk

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.