Last week, the Government finally confirmed the interest rates that will apply to the new pensioner bonds.
The bonds were originally unveiled in the March Budget and offer anyone over the age of 65 the opportunity to invest in a one-year, fixed-rate bond and a three-year, fixed rate bond.
The rates have been confirmed as 2.8 per cent for the one-year bond and four per cent for the three-year bond. These are gross rates, so for tax payers, income tax will reduce the return. Despite this, for most people, these rates will be better than what is available in tax-free cash ISA accounts.
Investors will be able to invest in either of the accounts or indeed both if they have sufficient capital.
Any amount between £500 and £10,000 can be invested into each of the accounts, so a couple over the age of 65 could invest £40,000 in total.
The bonds are issued by National Savings & Investments, so they are therefore backed by the Government, which means that the returns are guaranteed.
They are expected to be very popular when they go on sale next month and once the £10 billion allocation has been taken up they will no longer to be offered. Some commentators are saying that they will be sold out very quickly, but I spoke to National Savings last month and they are estimating that they should remain on sale until late summer 2015.
Unfortunately, there isn’t an option to take an income but early access is possible with a penalty.
These accounts will play a part of most investment portfolios. Over the medium to long term the potential returns may be significantly lower than those from a balanced investment portfolio, but for short-term money these accounts will play an important role.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org