Helen S | Edited by Johanna
Archived November 2015
Pensioner Bonds, for people 65 and over, which offered vastly higher rates of interest than normal savings accounts, have now CLOSED.
Rates were 2.8% on the one-year bond and 4% on the three-year bond, which at the time smashed standard savings rates. Although you can no longer get them, below is a Q&A for those who did. If you still have money you want to save, see our Top Savings and Top Cash ISA guides.
Pensioner Bonds have now CLOSED. We've kept this guide here for information for those who managed to get them.
Pensioner Bonds Q&A
What are Pensioner Bonds?
They're special savings bonds for over-65s, colloquially known as Pensioner Bonds, although their real name is the grand-sounding '65+ Guaranteed Growth Bonds'. There was a one-year bond paying 2.8% AER and a three-year bond paying 4% AER. They were available via NS&I – the Government's savings arm.
The term 'bond' makes this sound slightly more complex than it is – bonds can be many things. In this case, it just means a fixed-rate savings account. That means you get a guaranteed rate for a set time and your cash is locked away.
These bonds were first announced in March 2014 by the Chancellor, went on sale in January 2015, and closed on 15 May 2015. Key facts about the bonds include:
- You can withdraw cash from the bonds early, but you'll pay a penalty equal to 90 days' interest.
- Interest's paid at maturity on the one-year bond and annually on the three-year bond. However, it's added to your saved balance, so you can't use the interest as income, though there is a way around this.
- You could put up to £10,000 in each of the bonds (max £20,000 per person, or £40,000 per couple).
- You needed a minimum of £500 to apply for a bond.
Only one release of the bonds has been announced, and that's the one which launched on 15 January 2015 and closed on 15 May 2015.
NS&I said there is no update at the moment at all on whether Pensioner Bonds will come back. If anything does happen, we will update you here and in the weekly email.
Can I top-up if I took out a bond earlier in the year?
Not anymore, as the bonds are now closed. Previously, you could – although as you had to buy a new bond, it wasn't technically a case of topping up.
I managed to get the bonds – will I pay tax on these?
Yes, unlike cash ISAs or Premium Bonds, you do pay normal savings tax on the interest (ie, basic-rate taxpayers lose 20% of the interest). So, you will get a lower rate than the headline rate. We've worked out what you'd get on example savings levels at the four different tax bands with the 4% AER three-year bond:
Interest earned at different tax rates (after three years)
|Non-taxpayer||After 20% basic-rate tax||After 40% higher-rate tax||After 45% additional-rate tax|
With normal savings accounts, you're usually able to fill in what is known as an R85 form, which which lets the bank know that you don't earn enough to pay tax, and therefore the bank is able to pay your interest gross. However, NS&I is not part of HMRC's R85 scheme, so it will pay all interest with tax already taken off.
If you're a non-taxpayer, you'll have to reclaim the extra interest from the taxman at the end of each financial year. It's not difficult to do, but it is an added hassle. For details on how to reclaim overpaid interest, see HMRC's website.
If you're a higher- or additional-rate taxpayer, you'll need to declare the interest each year on your self-assessment form as with any other savings. For the three-year bond, this will actually mean that you're paying the extra self-assessment tax before you get your hands on any interest, as it's added to the account annually, so you only get it when the bond matures.
I've got the 3-year bond, can I withdraw early?
Yes, you can access some or all of your money for a penalty equivalent to 90 days' gross interest. Therefore, if you withdraw the cash after one year, a non-taxpayer would get a rate equivalent to 2.76% after reclaiming their tax back. That's very similar to the 2.8% the one-year bond would pay you.
Our table shows the 'average' rate a non-taxpayer would get withdrawing early from the three-year bond (after penalties, entire amount withdrawn).
Average rate if withdrawing early from the three-year bond
|Withdrawing after one year||2.76%|
|Withdrawing after two years||3.38%|
|Withdrawing after three years||4%|
NS&I says if you withdraw early, your capital plus interest (minus the penalty) will be back with you within 'a few days'.
The interest rates on these accounts were very favourable when they were released. Below shows how they compared with other savings options:
- Pensioner Bonds smashed normal savings. At the time that Pensioner Bonds closed, the top paying one-year fixed account was Aldermore Bank 1.9% AER, which paid 1.52% after basic-rate tax. The one-year bond pays 2.8% AER, so you'd get 2.24% after basic-rate tax. This difference is equivalent to an extra £72 a year on the full £10,000 stashed away, or £90 if you don't pay tax (once you've reclaimed the extra interest).
The three-year bond was an even better deal. The next best three-year account at the time Pensioner Bonds closed was Paragon Bank's 2.5% AER, which paid 2% after basic-rate tax. The three-year NS&I bond pays 4%, so you'd get 3.2% after tax. This equates to an extra £120 a year if you pay tax, and £150 a year if you don't. See our top savings guide for full fixed-rate savings options.
What about ISAs? How did they compare? Well, rates on ISAs are lower than for fixed savings, though the advantage is that you get to keep all the interest, an important bonus if you pay tax. But on the face of it, because the rates are so much higher on Pensioner Bonds, these did beat ISAs for basic-rate taxpayers.
However, if you're a higher-rate taxpayer, it's not a given that Pensioner Bonds would have been the best deal. As the three-year bond pays 4%, then, after tax, a higher-rate taxpayer gets 2.4%. But, there are some fixed-rate ISAs (though longer term) which beat that return, as you get to keep all the interest AND it stays tax free.
You could get 3-5% on your savings in a bank account NOW (though you'll need to work for it). Innovative 'loss-leader' bank accounts are the new players in the savings market. The Santander 123 account will pay you 3% AER on savings up to £20,000 and will pay your interest monthly. Or TSB will pay you 5% AER on up to £2,000 held.
If you're really clever, you can play the system by opening multiple accounts and moving your cash to max interest. Our 5% savings loophole guide tells you how.
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Are my savings safe in these bonds?
Yes. These bonds are operated by NS&I, which rather than being a bank is backed by the Treasury. This means you get 100% safety for your cash (well, unless the UK itself goes bust, in which case we've all got bigger problems).
However, NS&I can't play this card as strongly as it used to. This is because the state now guarantees every UK-regulated savings account up to £75,000 per person, per institution, and you could put only £20,000 each in Pensioner Bonds.
The one minor advantage it had, though, is that NS&I will never go bust. Other institutions may, and then you'd receive your money (including interest) from the Financial Services Compensation scheme, but this could take up to a week. Then again, if your money is in a fixed-rate account, it is locked away anyway, so that's unlikely to make much difference.
Read the full Are Your Savings Safe? guide.
Why were these bonds offered?
Savings rates have been dire for a few years now. This is because of the combination of the rock-bottom Bank of England base rate and the Government's attempts to get the financial markets moving again by offering cheap cash to banks to lend out to mortgage hunters and small businesses.
The combined effect was to push savings rates down to unprecedented low levels – banks didn't need your cash, as they had the Government's.
So, this was the Treasury's attempt to try to give something back to the savers who have been hit hardest by low interest rates. Many older people rely on savings interest to boost their pension, so these high-interest bonds were an attempt to help.
Pensioner Bonds are now closed, but they aren't the only way for older people to save money. See Over-50s MoneySaving for 50 tips on how you can save your hard-earned cash.
I've seen a different website offering the bonds. Can I use that?
Beware scams. Pensioner Bonds have now CLOSED, so any claim to still offer them is a scam.