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Pensioner bonds due to mature: how to find a new deal

Time to find a new home for your cash and check if you owe tax

The last of the National Savings & Investments (NS&I) three-year ‘pensioner bonds’ will mature by tomorrow (15 May 2018).

If you’re one of the 885,000 savers that invested, it’s time to decide what to do with your money and check if the interest you have earned will be taxable.

Which? sets out the best savings accounts to go for and explains how the introduction of the personal savings allowance could impact the interest you get and your tax bill.


What are pensioner bonds?

65+ Guaranteed Growth Bonds or ‘pensioner bonds’ were launched by NS&I on 15 January 2015.

Older savers could choose from a one-year fixed-rate deal paying 2.8% or a three-year fixed-rate deal paying a massive 4%.

The market-leading deals were open to anyone over the age of 65 and allowed them to invest from £500 up to £10,000.

These bonds were on sale from 15 January 2015 until 15 May 2015, so over the past four months, the three-year deals have been maturing.

If you have a maturing pensioner bond time is running to decide what you want to happen to your cash before it is reinvested and locked away for another three years.

Best new homes for pensioner bond savings

NS&I says that all savers with the three-year 65+ Guaranteed Growth Bond will be sent a pack 30 days before the investment maturity term to explain the options available.

Savers will be able to reinvest into the latest issue of Guaranteed Growth Bonds. The one-year deal pays 1.5% while the three-year deal pays 2.2% gross AER.

For comparison, here’s what the top deals across easy access and fixed-rate bonds are paying right now.

Account Type of deal Rate (AER) Minimum deposit
Paragon Limited Edition Easy Access Issue 6 Easy access 1.31% £1
Milestone Savings One-Year Fixed-Term Deposit One-year fixed-rate bond 1.9% £1,000
Hodge Bank Two-Year Fixed-Rate Account Two-year fixed-rate bond 2.1% £1,000
RCI Bank Three-Year Fixed-Term Account Three-year fixed-rate bond 2.31% £1,000
Vanquis Bank Five-Year Fixed-Rate Bond Five-year fixed-rate bond 2.7% £1,000

Source: Which? Money Compare

As you can see you can get a much better three-year fixed-rate with the RCI Bank Three-Year Fixed-Term Account which pays 2.31%.

However, apart from the rate, you may also want to consider if you want to have more access to your savings and fix for a shorter period this time around.

Personal savings allowance impact

The introduction of the personal savings allowance on 6 April 2016 slashed the amount of tax nearly all savers had to pay on the interest they earned on their savings.

It means that basic rate taxpayers are allowed to earn up to £1,000 and higher rate taxpayers can earn up to £500 in interest before any tax is due. Additional rate taxpayers don’t have an allowance so must pay their marginal rate on all savings income.

The timing is significant for pensioner bonds, as anyone that opened a three-year deal between 15 January and 5 April 2015 will receive less interest compared to those that opened the same deal between 6 April and 15 May 2015.

How much interest will pensioner bonds pay?

For those that opened the three-year bond between 15 January and 5 April 2015, the interest received on the first anniversary would have been paid net tax at the basic rate – meaning the total interest earned minus 20%. So on a £10,000 investment, a bondholder would get paid £320 rather than £400.

But in year two and three, the interest would have been applied gross under the new PSA rules, so the full amount of interest earned would be paid out.

Those that invested in the bonds between 6 April and 15 May 2015 were paid gross interest across all three years as the entire period fell under the PSA rules. If their total earnings from all savings products were less than their PSA, they would not have to pay tax on their earnings.

The table below shows how the timing of your investment impacts the interest received over the three years.

Interest paid out by NS&I on pensioner bonds

Interest paid on £10,000 (opened pre 6 April 2015) Balance at the end of the year Interest on £10,000 (opened post 6 April 2015) Balance at the end of the year
Year one £320 £10,320 £400 £10,400
Year two £412.80 £10,732.80 £416 £10,816
Year three £429.31 £11,162.11 £432.64 £11,248.64
Total £1,162.11   £1,248.64

The annual amount of interest paid in a tax year counts towards your PSA, rather than the total amount of interest you earned over the three years.

Do you need to pay tax on pensioner bond interest?

If you have earned more than £1,000 interest in a tax year (or £500 as an additional ratepayer), you will need to pay tax on the extra income at your marginal rate.

Investing in the NS&I three-year bond won’t push you over on its own, but it’s important to consider all your other taxable savings and investments.

If you’ve exceeded the PSA in a tax year, your tax code should have been adjusted by HMRC.

If it hasn’t, you should contact HMRC to let it know or declare the earnings on a self-assessment tax return.

How can I be taxed on money I don’t have access to?

Despite being a fixed-rate bond the money put in NS&Is’ bonds were technically available – subject to a penalty of 90 days’ loss of interest.

This is a vital distinction when trying to work out whether or not the interest earned contributes to your PSA.

HMRC taxes savings based on ‘availability’ rather than access.

So because you could have taken money out of the NS&I bond after year one and probably managed to pocket a return even after the penalty – it counts towards your PSA for that year.

This is just a quirk of fixed-rate bonds that have flexible access though.

For other fixed-rate bonds that allow no access at all for the term the interest will not count towards your PSA until the year it matures.

 

This article has been updated 

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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