- Update 15th January - bonds now on sale
The Chancellor has now confirmed the interest rates which will be offered on the new NS&I Income Bonds for the over 65s, which go on sale in January 2015 - although the exact date is not yet known. In the Budget, George Osborne committed to “market beating” rates for these fixed-term bonds and the interest rates are a competitive 2.8% for the 1-year and 4% for the 3-year bond.
How they compare to high-street accounts
This is significantly higher than the leading rates available on the open market, which are currently 1.85% for a 1-year fixed-term bond and a 3-year bond at 2.5%, both from First Save.
How much can be invested?
Investments of between £500 and £10,000 can be made in each 1-year or 3-year bond. Maximum £20,000 per person or £40,000 per couple, single or joining applications can be made.
How much tax will be paid?
Basic-rate tax will be deducted automatically at 20%, regardless of the rate of tax payable by the individual taxpayer. Higher and additional rate taxpayers will have to pay an additional 20% and 25% in the year the interest is paid. Non-taxpayers will need to reclaim the tax paid – these bonds are not part of the R85 scheme which allows interest to be paid gross.
How do you apply?
These bonds can be applied for through the NS&I website, by post or online - but the exact details are not yet available.
How quickly will they sell out?
There's a budget of £10 billion set aside for these bonds and given the interest rates and that these may be the only time these bonds are offered, it's expected they'll sell out very quickly, within weeks rather than months.
Should I cash in my low-interest rate ISA to invest in these bonds?
By way of comparison, NS&I’s Direct ISA pays 1.5%, which is equivalent to 1.87% for a basic rate taxpayer, 2.50% for a higher rate taxpayer and 2.72% for an additional rate taxpayer. Even with tax deducted, some people will probably get more interest from one of the new bonds rather than a cash ISA, though they are less flexible as they have to be held to maturity for all the interest to be paid.
However taking money out of tax-free savings to put into taxable savings is counterintuitive. The tax benefits of an ISA are cumulative so it will be a rare set of circumstances where this is a good idea for long-term savings. Withdrawing money from an ISA loses that ISA wrapper for good, and while interest rates within Cash ISAs look pretty unappetising right now, this won’t be the case forever. Savers may also want to retain their ISA wrapper to move to a Stocks and Shares ISA at a later date, as their financial circumstances change.
Furthermore ISA income is not considered in some means tests, whereas savings income is.
Savers also need to be careful of loss of interest when moving from one account to another.
Danny Cox, from financial adviser Hargreaves Lansdown said: "George Osborne promised market-beating rates and he has delivered. I expect these bonds to sell like hotcakes. After using your cash ISA subscription these bonds should be close behind on the cash saver’s shopping list."