Skipton Building Society launches new pensioner bond – is it any good?

A new fixed-term account from Skipton Building Society has launched for savers aged 66 or over, offering a competitive rate of 4.25% gross and promising to boost pensioners' annual income by over £1,000.

Interest on the Three-Year Income Bond is more than twice the current 2% rate of inflation. But with so many high-interest deals currently on the market, is it the best option for customers looking to grow or draw an income from their retirement pot?

Which? takes a closer look at what Skipton's account offers and how it compares with other savings products.

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How does Skipton's new account work?

Skipton Building Society's Three-Year Income Bond offers 4.25% gross (the term used to describe interest that isn't compounded). But unlike other fixed-rate deals on the market, it's only available to customers who are aged 66 years old or over.

You'll need to deposit a hefty lump sum of £10,000 to open the account and, as with all fixed bonds, that money will be locked away for the entire term. So if you invest the cash today, you won't be able to touch it until 2027.

However, because interest is paid monthly into a nominated bank account rather than added to your savings pot, you'll have the benefit of receiving a regular income. For a £10,000 holding that works out to be £35.41 a month, rising to £88.54 with the maximum balance of £25,000.

Now is also a good time to fix as if the Bank of England decides to lower the base rate, we're likely to start seeing interest on savings accounts drop more rapidly. 

Customers who have been a Skipton member continuously since 12 June 2022 can unlock an even higher rate of 4.5% and stand to earn even more.

How does it compare with other similar deals?

Savers shopping around for a three-year bond that pays monthly interest into a nominated account will find that their choices are limited. 

Apart from Skipton, only the three-year fix from National Savings & Investments (NS&I) allows you to earn a regular income from your savings and is open to customers of all ages. Its Guaranteed Income Bonds, however, offer a lower rate of 4.07% gross. 

Despite the lower returns, NS&I's account allows you to invest a much larger amount of up to £1,000,000. Unlike most banks that only guarantee your savings up to £85,000, NS&I secures 100% of your savings, however much you invest. So pensioners with very large retirement pots might be happy to accept a lower rate in exchange for returns on more of their money.   

If you don't want to fix for so long, there are similar shorter-term deals out there. Saffron Building Society's Monthly Income Bond can be fixed for either one or two years, offering gross rates of 4.31% or 4.11%, respectively. You can start earning interest with a low minimum deposit of £500, but can place up to £2,000,000 in the account. Just remember that the Financial Services Compensation Scheme (FSCS) protects deposits of up to £85,000 per person, per institution if a provider goes bust. So you might want to limit how much you save with one provider.

Progressive Building Society also offers a two-year Monthly Income Bond with a rate of 4.3% gross. While you're allowed a balance of up to £1,000,000, it has a much higher minimum deposit of £25,000. It also has restrictions on how you can open and manage the account. There is no online or app access, so everything must be done either in branch or by post.

• Find out more FSCS: are my savings safe?

Easy interest with instant access

To get a higher rate without having to lock your money away for a long time you could open an instant-access account. Many have the option to have interest paid monthly and, because you have the flexibility to dip into that income whenever you need, you won't have to pay savings income to another account to access it.

By choosing to have that money added back into the pot, you’ll keep earning on top of each previous month’s interest, growing your savings quicker. This process is called compounding, and products that do this use Annual Equivalent Rate (AER) to describe how interest is calculated.

According to Moneyfacts, the current top rate for a monthly interest instant-access account comes from Oxbury Bank. It offers a rate of 4.94% AER, requires a minimum deposit of £1,000 and allows you to save up to £500,000. 

Of course, it goes without saying that the amount of money you actually earn in interest will depend on how much you put in and withdraw each month. You won't see much of a return if you're regularly emptying your account, for instance.

The other thing to bear in mind when opening an instant-access account is that the rate is variable and could go up or down depending on the market. So if, for example, the Bank of England's base rate does start to drop, you may find your provider adjusts the savings rate downwards in response.

• Find out more: best savings accounts.

Do you have to pay tax on savings income?

You may be able to earn interest from savings without paying tax if the wages or pension income you receive doesn't exceed your personal allowance (normally £12,570).

You may also be able to earn £5,000 of interest tax-free with the starting rate for savings if your income is less than £17,570.  Every £1 of other income above your personal allowance reduces your starting rate for savings by £1. 

If your income is more than £17,570, the personal savings allowance (PSA) – which shields a portion of interest earned on savings from income tax – could help. The PSA currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers don't have a PSA, meaning all their savings interest is subject to income tax.

If you go over your allowance tax on savings, interest is charged at the same rate as the tax you pay on your annual income (including your pension). 

The savings balance required to exceed the PSA has shrunk considerably over the past couple of years due to rising savings rates. Assuming there is no other savings income, a basic-rate taxpayer opening Skipton's new three-year bond, paying 4.25% gross, would need a balance of around £24,000 before breaching the PSA. But a higher-rate taxpayer would only need £12,000 in their account before they had to start paying tax on interest. 

• Find out more: tax on savings interest and investment income.

Ways to keep your tax bill down

If you're worried interest on your nest egg could push you over your PSA, you could leave just enough money in your savings account to hover below the tax threshold and invest the rest into in an Isa.

Savers can deposit up to £20,000 a year, tax-free, into a cash Isa, a stocks and shares Isa or an innovative finance Isa, or split the allowance across the three types. 

Rates on cash Isas have boomed over the past couple of years and Moneyfacts data shows the average rate for a one-year fix currently stands at 4.44% AER. The average rate for a cash Isa lasting longer than a year is 4.08%.

You could also consider buying premium bonds, where you can hold up to £50,000 tax-free. While they don't pay any interest, every month you'll be entered into a prize draw with a chance of winning anything from £25 to £1m. Just be aware that for every millionaire jackpot winner, there will be many, many people not winning anything at all. It really is the luck of the draw.

• Find out more: best cash Isas 2024.