Chancellor George Osborne thought he was doing savers a favour when he launched pensioner bonds earlier this month, but subsequent events have proved him wrong.
Pensioner bonds were designed to give the over-65s much-needed respite from today’s low interest rate world, by offering a far more generous rate than they could elsewhere, with zero risk.
The 65+ Guaranteed Growth Bonds, as they’re officially called, pay a fixed rate of 2.8% before tax over a one-year term, or 4% a year over three years.
With the average savings account paying 0.67%, according to Moneyfacts, you can see the attraction.
But for millions of savers under age 65, pensioner bonds are a disaster.
Great Savings Rate Massacre
The launch of pensioner bonds sparked a stampede, as 110,000 savers snapped up more than £1bn worth in the first two days.
National Savings & Investments (NS&I), which issues the bonds, saw its systems collapse under the weight of demand.
More than half of this money, over £500m, was pulled out of traditional bank and building society savings accounts.
Traditional savings providers simply couldn’t compete with the rates on pensioner bonds, so they didn’t even try. Instead, they gave up, and started slashing their existing rates to dismal new lows.
More than 100 savings accounts have cut rates so far in 2015, with more expected to follow.
Pensioner bonds may be good news for the over-65s, but they spell misery for everybody else.
Low Rates Forever
Pensioner bonds aren’t entirely to blame for the latest savings rate cull. Another drop in the inflation rate, which is now 0.5%, also played a part.
Now almost nobody expects the Bank of England to raise base rates in 2015, giving little hope that savings rates will rise this year. As deflation spreads, rates could stay low for years.
If you are over-65, you have the consolation of being able to can invest up to £10,000 in each of the two pensioner bonds. But don’t hang around, because only £10bn has been allocated to the bonds, and that may soon run out.
For everybody else, the search for a decent return has got even harder.