Will you recommend buying pensioner bonds?

adnanmanzoor

Public (above 65) seems to be investing loads of money into pensioner bonds. But does it make sense to invest into investments which locks my money for 3 years and also are not inflation protected.

Browntoa

http://www.moneysavingexpert.com/savings/pensioner-bonds


MSE's own article

alanq

It seems unlikely that inflation will average higher than the 3.2% interest rate after basic tax during the next 3 years. If general interest rates and inflation do soar the money is available to withdraw after a penalty equivalent to 90 days gross interest.

bowlhead99

If you don't have an alternate use for the money, yes it makes sense.

Alternate uses for the money would include using shorter term accounts (for example, high interest current accounts paying 3, 4, 5%) or shorter term fixes with the opportunity to go and put some of the money on deposit at a higher interest rate for part of the time if available interest rates improve.

If you have maxed out all the top offers for bank interest, and don't have access to inflation protected bonds, and don't want to do without the cash for 10 years or more to make stock market-based investments, then there is no harm in putting a bit away in these.

Do you think that inflation will really run at a rate of 4% a year compound for the next 4 years, beating your return after tax, Most people think it will not. If it does, whatever you save or invest in will be affected just the same way.

The risk of investing in these bonds is not so much inflation, just the fact that you are locked in and maybe something better comes along. If you think there will be something better coming along that can pay more, then perhaps you could put your £10k in a Santander bank account for year one at 3% and then move into some other nice product at 5% for the last two years. However, that presumes that a 5% two year deposit product becomes available in a year's time, while the general market rates for two year deposits are only a little over 2% at the moment.

le_loup

A copy and paste from the article on this website:

The three-year bond ALWAYS wins. If you're not planning to go for both bonds, it's best to go for the three-year bond. That's because you can access some or all of your money for just a 90 day interest penalty. If you think about it, 90 days is around a quarter of a year, so that's how much interest you'll lose.

Therefore, even if you only want the money in for a year, the three-year bond pays more than the one-year bond even after accounting for the penalty. Our table shows the 'average' rate you'd get if you withdrew early from the three-year bond (after penalties, assuming you withdraw the entire amount).


Average interest rate if withdrawing early from the three-year bond

Withdrawing after one year3.01%Withdrawing after two years3.5%Withdrawing after three years4%

InvestInPoker

If I qualified age wise to be able to put money in them I would.

adnanmanzoor

Though inflation will not beat after tax return but it will reduce the overall rate. The negative side for me is if lock down my money for 3 years and still get the same inflation adjusted return, what is the point of locking down funds at age 65 when medical costs are going to rise?

bowlhead99

adnanmanzoor wrote: »

Though inflation will not beat after tax return but it will reduce the overall rate.

Inflation reduces the overall effective rate on all accounts. So the existence of inflation does not make it a bad product. If you put your money in a 1% account and suffer 3% inflation a year you are worse off than if you put your money in a 4% account and suffer 3% inflation a year. So it's still better going for the account that pays the better rate, unless you know or have reason to believe that an alternative will come along.

The negative side for me is if lock down my money for 3 years and still get the same inflation adjusted return, what is the point of locking down funds at age 65 when medical costs are going to rise?

What else are you going to do with the funds ?

Let's say your medical costs for a stay in hospital are £1000 at age 65 and you expect them to be £1200 at age 68. Would you prefer to have put £10000 into a bank account earning 1% , giving you £10300 by the time you're 68? Or put £10000 into a government product earning 4% giving £11250 by the time you're 68 (I'm ignoring taxes).

The optimal thing to do if you know you have a medical bill of £1200 at the age of 68 is to ask if you can pay it this year at current prices and maybe only pay £1000 for it now when you're 65. Then when you're 68 and ill, simply show up at the hospital and say it's all prepaid! That is a better 'return' than investing in the bond. Good luck finding somewhere that lets you do that, risk free.

N1AK

adnanmanzoor wrote: »

Though inflation will not beat after tax return but it will reduce the overall rate. The negative side for me is if lock down my money for 3 years and still get the same inflation adjusted return, what is the point of locking down funds at age 65 when medical costs are going to rise?

I'm not sure what the two have to do with each other? Unless there is some way you can spend the money now to protect you from future medical cost increases (and those costs increase faster than the bond return), then the only question is how to get the best return, with risk and accessibility criteria that fit the individual.

Browntoa

what rising medical costs ?? when do you pay for NHS treatment when retired ??

Browntoa

and looking at there user profile I suspect they were here attempting to self promote as identical question on their own web site