The chancellor, George Osborne, is clearly very fond of pensioners. And he is doing all he can to make them fond of him too. This year we’ve seen stunning changes to the pensions system. The annuity system has been replaced by one in which everyone can draw cash from their pensions as they like (subject to paying income tax at their marginal rate).
Inheritability has been introduced – those who die before 75 can pass their pensions on tax-free; those who die after 75 can pass them on tax-free, barring marginal income tax payable by their heirs.
Now, having offered pretty much all he can on the pensions front, Osborne has turned his attention to other types of savings. The Autumn Statement told us that individual savings account wrappers can now be inherited by spouses without any loss of tax benefit.
This week we got details of the super-high rates to be offered on his new idea – pensioner bonds. These are going to be issued by National Savings & Investments (NS&I) from next month – for the over-65s only.
There will be two options – a one-year bond paying 2.8% and a three-year bond paying 4%. You can buy either or both to a maximum of £10,000 per person per bond.
That means a couple can put in an impressive total of £40,000 if they get their applications in early (NS&I will take a maximum of £10bn on a first-come, first-served basis).
There are catches, of course. The main one is tax. The income on these bonds is taxable, with 20% deducted at source. There is an administration bore in there for non-taxpayers, who will have to claim it back from HMRC.
But there is more administration involved for higher-rate taxpayers: the interest isn’t paid out until the end of the term, but they have to declare it on their tax return every year. That means that, especially with the three-year bond, they will be paying tax on money they have not yet received, something not everyone will want to do.
It is also worth noting that there is a risk here: the rates look great now, but it is always possible (if unlikely – looking at the moment) that inflation and rates might rise fast in the next few years, making them look less good in years two and three of the deal.
That said, these rates are as good as it gets today (the highest one-year rate elsewhere is 1.85%), so if you have spare cash you should probably just let Osborne buy your affection.
You can apply at nsandi.com, or you can write to National Saving & Investments, Glasgow G58 1SB – although, given how fast the bonds are likely to sell out, you might want to take the website route.
You can sign up for email updates on the site now so you know when the release date comes (it hasn’t yet been announced).