What are the best alternatives to pensioner bonds?
The window for purchasing the Government-backed pensioner bonds closed on Friday, and it is interesting that they are, reportedly, the most popular financial product ever marketed. The fixed-rate bonds offered market-stumping rates of 2.8% AER for one year and 4% AER over three years, and allowed the over 65s to invest up to a maximum of £10,000 into each type of bond. Although the government had originally limited the available amount to £10 billion for these bonds, the Chancellor then changed his mind, and instead they were on unlimited sale for four months. But now that the door has firmly closed on that investment, what alternatives are there for those looking to stash some more cash?
First up, in advance of the new savings allowance coming in from next April, are cash ISAs, which give a higher equivalent rate of return.Which!!! best buy tables show the best one-year fixed-rate ISAs are from Al Rayan Bank and Punjab National Bank, both offering rates of 1.9% AER. However, they warn that the rate from Al Rayan Bank is an 'expected profit rate' from Sharia compliant investments, so returns are not guaranteed. Punjab National Bank also offers the best three-year fixed-rate at 2.3% AER, and a number of others offer rates around the 2.25% mark.
But if you’ve already invested the maximum £15,240 in an ISA for this year you might want to look at savings accounts. Punjab National Bank is again top of the rate pops for both one-year and three-year fixed-rate savings accounts, their one-year fix paying 2% AER and the three-year fix paying 2.55% AER. Note that if you have a spare £10,000 to stash for three years, figures from Moneyfacts show AgriBank as top banana with an impressive 2.7% return.
Which!!! also recommend looking at current accounts for smaller cash piles. Nationwide’s FlexDirect account pays 5% AER on balances up to £2,500 for the first year and Santander pays 3% AER on balances between £3,000 and £20,000 on its 123 current account, but watch out for qualifying criteria like minimum payments in or direct debits. You could also look at peer-to-peer lending, which offer savers favourable rates, often 5-7% AER over five years, but currently without the FSCS £80,000 savings protection.
Finally, another option open to those likely to have qualified for Pensioner Bonds would be to invest more in the State Pension. Only open between this October and April 2017, qualifying individuals (women born before April 6, 1953, and men before April 6, 1951) can purchase additional ‘annuity’ in £1 per week increments, for a fixed sum now. The capital amount of investment/the amount you will receive depends on your age and gender, but the returns could beat current annuity rates. Take the following official example of a 65 year old man. To get the maximum top up of £25 per week, he’d pay £22,250, which works out at an 'annuity rate' of 5.84%, which is inflation-proofed and offers a half-pension to the spouse on death. This is around half the price he’d pay if he bought a similar annuity from an insurance company, and he’d only have to live 17 years to 'get his money back', even though the ONS would estimate he’d actually survive a further 21 years and seven months, precisely.
However, the sweeping pension changes recently introduced removed the requirement to purchase an annuity on death, and while a 5.84% return might compare favourably to savings rates available now, you do not get your capital back, and all your cash will be fully exhausted on a second death. Also, who’s to say they won’t change the state pension rules again before you have drawn all your ‘break even’ benefits? It’s not like they’ve totally messed with the system before or anything…