Pensioner Bonds – what you need to know

In early 2015 Pensioner Bonds will be introduced as per the Chancellors promise in the budget of 2014. The exact release date is not yet known.

Savers have suffered from a dramatic fall in interest rates in recent years and the new bonds are an attempt to address this in some way, albeit only for those aged 65 or more.

There will be 2 variants available. One will offer a rate of 2.8% over a year and the other will offer 4% over a period of 3 years.

As ever, with anything that stands out as being a ‘good deal’, there will be a limit on how much can be saved. In this case there will be a maximum of £10,000 per person per term. This means that a maximum of £20,000 per person could be saved in the bonds over the 2 periods. The minimum investment will be £500

The interest on them will be Taxable at the savers normal rate of Income Tax.

The Bonds will be made available through the state-owned savings organisation, NS&I.

The Treasury, which estimates that the scheme will cost the Tax payer £325million, will issue up to £10billion worth of bonds and there is the likelihood that they will be fully subscribed within a matter of months.

Savers must be prepared to tie their money up for a period of 1 or 3 years. Early withdrawal will result in a penalty equivalent to 90 days interest.

Once launched they will be available by post, telephone or online direct from NS&I.

Although not available to everyone, and they won’t be suitable for everyone in the target group, they will help some people to achieve a much higher return than can be obtained using a typical Bank or Building Society account.

Case Study: Long Term Care

We were introduced to a family who were looking to secure a place in a residential home for their mother and needed to find a sustainable way to fund her care for the foreseeable future.

We met with the clients to gain a thorough understanding of the situation and the finances they had available to fund their mother’s care:

  • The client’s mother, ‘Mrs A’, was 84 years old and her mobility had deteriorated to the point where she could no longer safely live alone.
  • The main cause of Mrs A moving from her own home was because of mobility problems rather than chronic health problems.
  • Mrs A had sold her own home for £250,000, which meant that she was a ‘self-funder.’
  • Mrs A’s children had looked at many different homes and decided on the best one for their mum, which would cost more than the local authority would normally pay.
  • The cost of the home was £544 per week.
  • The local authority would generally look to pay much less than this; typically £424 per week.

The family’s primary concern was that, if Mrs A’s money ran out, her place at the care home would be under threat at a time when she was likely to be much more vulnerable.

By helping the family to find a means of funding their mother’s care, we could provide them with the peace of mind that their mum would be safe and secure in the long term.

How we helped

We recommend an Immediate Care Annuity [ICA], which would meet the family’s needs by paying the care home fees, a total of £28,325 per annum, for the rest of Mrs A’s life.

The family negotiated with the care home that the cost of care would not rise for the first five years and, after five years, only by no more than inflation. The care home accepted this because they felt that the longevity of the place was secured.

The ICA was fully underwritten as the provider gathered all the necessary medical information relating to Mrs A so that they could assess her perceived longevity.

  • The ICA cost a total of £160,000.
  • The family were able to pay for the ICA using the proceeds of the sale of Mrs A’s house.
  • Mrs A retained the balance of £90,000 to ultimately pass on to her children or to provide the top up of cost between the ICA and increasing care home fee’s as time passes by.

The family’s objectives have been achieved by ensuring continuity of the majority of the care home fees by transferring the ‘risk’ of money running out to an insurer.

Now 3 years down the line, Mrs A is happy in her residential care home and the family have invested the £90,000 residue from the sale of her home in suitable investments for use later, if needed.

Our case studies are designed to give you an insight into how we have advised a variety of clients on their specific financial needs. It is intended for information and illustration only and should not be taken as individual advice.

If you have any questions relating to your own circumstances, please contact us.

* In order to protect the confidentiality of our client’s, we have changed the names in our case studies. They are, however, all based on the real life experiences of our clients.