If you put money into the one-year Pensioner Bond, you will need to look for a new home for your savings from January.
Older savers who invested in the Government’s Pensioner Bonds last January will see their returns slashed from this week as the one-year bonds mature.
The savings scheme was announced as part of Chancellor George Osborne's Budget in 2014. Those aged over 65 could save up to £10,000 in each of the one-year and three-year bonds – so a maximum £20,000 per person.
The bonds proved popular, with £13 billion ploughed into the bonds, which were operated by the Government-backed National Savings & Investments (NS&I).
But savers who took out one-year bonds will see their returns fall sharply.
Falling rates
Officially known as 65+ Guaranteed Growth Bonds, Pensioner Bonds first went on sale in January 2015 and offered top rates for older savers: 2.8% for a one-year fixed term and 4% for three years.
A pensioner who saved £10,000 into the one-year bond would have earned £280 in interest before tax – pretty impressive in today’s low interest rate environment.
But NS&I has confirmed that once the one-year bond's fixed term ends, there will no high interest alternative available. NS&I says it will write to savers around 30 days before their bond matures to explain their options.
Savers who don’t withdraw their cash will automatically be switched to a one-year Guaranteed Growth bond offering just 1.45% AER, just over half the previous 2.8% rate.
[SPOTLIGHT]Option two is to re-invest the cash into NS&I’s standard Guaranteed Growth bond for two (1.70% AER), three (1.90% AER) or five years (2.55% AER).
The third option is for pensioners to withdraw their cash and re-invest it elsewhere.
Alternative one-year bonds
There are much better savings rates available if you switch your money to another provider.
Milestone Savings offers the best rate on a one-year fixed rate bond, paying 2.10% AER (be warned this is an anticipated profit rather than interest rate, as the account is Sharia compliant).
If you want a better return, you will need to lock your cash up for longer. You can get a rate of 2.78% from Al Rayan Bank over two years, 2.88% over three years again from Al Rayan Bank or 3.11% from SecureTrust Bank over five years.
When you've found the right account, you need to inform NS&I by post or online as phone instructions won't be accepted.
Compare savings accounts with loveMONEY
High-interest current accounts
Traditionally it wasn’t wise to leave cash languishing in a current account but it’s now a different story – if you pick the right account.
With the Santander 123 Current Account you get 3% AER on balances of £3,000 to £20,000. There’s a £5 monthly fee, but also cashback on household bills which could cancel this out.
Another option is TSB’s Classic Plus which pays 5% interest on balances up to £2,000 – but no interest at all is paid on amounts over £2,000. The account needs to be funded with £500 a month for the 5% rate to apply.
Nationwide’s FlexDirect account also offers interest up to 5%. But this is only on balances up to £2,500 and the rate is only guaranteed for a year. Regular funding of £1,000 a month is required.
Tesco Bank pays 3% interest on balances up to £3,000 with no minimum funding requirement.
Compare current accounts with loveMONEY
Other options
Pensioners with maturing bonds could also move their money to either a Cash ISA or easy access savings account.
With an ISA you don’t pay tax on the interest. UBL pays 2.55% if you’re happy to tie up your money for five years and have at least £2,000 to stash away. If you only want to lock your cash away for a year, the best you can do is 1.90% from Al Rayan Bank.
The best paying easy access account is from RCI Bank which pays 1.65% with a minimum investment of £100, while ICICI Bank pay the same rate but you can open its account with only £1.
Compare savings accounts with loveMONEY
This article has been updated