It’s a sign of how desperate savers have become that the launch of so-called pensioner bonds at the start of this year generated so much excitement.
When National Savings & Investments (NS&I) launched the 65+ Guaranteed Growth Bonds in January its phone lines were jammed and its website crashed under the weight of demand. More than a million pensioners locked into the Government-backed bonds, lured by the market-beating rates on offer.
Roll with it
So what was all the fuss about? A one-year bond paying 2.8% a year and a three-year bond paying 4% a year. That’s hardly rich pickings, although it’s certainly far more attractive than what follows. When one-year pensioner bonds start to mature from 15 January, savers are being offered a rollover rate of a meagre 1.45%, via the NS&I standard Guaranteed Growth Bond. This is the default rate if you simply leave your money be.
Those who want to lock in for longer can fix for two years at 1.7%, for three years at 1.9%, and five years at 2.55% a year. These rates are unlikely to spark another stampede.
In a fix
Savers who put the maximum £10,000 into their one-year bond will have £10,280 to re-invest, minus any tax they pay on the interest. That’s a lot of money and you need to invest it wisely. What you do partly depends on your personal circumstances. For many older people with a low-risk outlook, cash is the only sensible option, probably in the shape of another fixed-rate bond.
You’ll get a better deal by shopping around on the open market. For example, challenger bank Shawbrook currently offers the best one-year fixed bond at 2.15%, comfortably beating NS&I’s default rollover rate. The FirstSave two-year bond pays 2.4% while its three-year bond pays 2.73%. United Trust Bank pays 3.1% over five years, but some may be reluctant to fix for so long, as rising interest rates could quickly make that return look derisory.
Pensioners who retired relatively recently should consider the higher potential returns available from stocks and shares. As life expectancy grows, many will spend two or three decades in retirement, and over such lengthy periods stock markets should give you a far better return than cash, although with more short-term volatility.
Hit the jackpot
Through company dividends, shares can pay you a higher income than cash. Many leading FTSE 100 names offer yields of 4% or 5% a year, far higher than you’ll get from any fixed-rate savings bond. Plus you also get the potential for capital growth on top as well. You can either take those dividends to top up your retirement income, or reinvest them to boost the long-term value of your pension. That can turbo-charge your savings over the years, while cash chugs along in the slow lane.
You should never invest money in stocks and shares that you might need in the next five years or can’t afford to lose if markets correct. Whatever you choose to do, don’t simply roll over and accept that measly 1.45%.