Budget Update: Government Launches New Pre-Retirement Bonds!

Ian King, Thursday March 20, 2014

On 19th March 2014 Chancellor George Osborne announced a whole raft of new changes to the UK savings and investments landscape.  Whilst much of the focus was upon the newly increased ISA allowance (£15,000 from 1st July 2014) and greater flexibility as to how private pensions can be accessed, he also launched a new pensioner bond via National Savings & Investments.

Pensioner Bond

This new account will be limited to a £10,000 investment and only available to those aged sixty-five or over but will offer “market leading rates” which are currently projected to be 2.8% over one year and 4% p.a. over three years.  The bonds are set to be launched in the first quarter of 2015.

What got less attention was the launch of the new “bond” available to pre-retirees which can potentially offer substantially higher rates of interest but again without any investment risk!

To illustrate the new “bond” consider the following example:

Example

Steve, 57, is currently three years from his planned retirement date of his sixtieth birthday, at which point a deferred pension is set to commence paying him £18,000 per year (before tax).  His pre-tax earnings from his employer are presently £60,000 per annum.

As his children have recently left home he feels that he has a little surplus income this tax year so he decides to place £8,000 into a personal pension.  The pension provider automatically claims a further £2,000 in tax relief from HMRC and as a 40% taxpayer Steve then claims a further £2,000 in tax relief via his self-assessment tax return.  In effect Steve now has £10,000 in his personal pension at a net cost to him of £6,000.

When Steve reaches retirement three years later he decides to take his personal pension benefits.  Steve is quite a cautious investor so he had allocated his £10,000 pension contribution into a cash fund.  This meant that his pension fund at retirement was exactly the £10,000 that had been put into the pension three years previously.

As his sole taxable income in the first year of his retirement is his £18,000 deferred pension Steve is now a basic rate taxpayer.  Using the new pension rules proposed in the budget Steve is able to access his whole personal pension fund in one go.  The first 25% of his fund is available to him tax-free (£2,500) with the balance taxed at his marginal rate (20%).  After all taxes have been paid Steve has £8,500 in his pocket; or a post tax gain of £2,500 on his initial £6,000 investment.

Such a gain equates to an annual return of 12.31% per annum over the three year period to retirement. As a 40% taxpayer prior to retirement Steve would need to find an alternative taxable investment offering him a gross investment return of 20.52% per annum to be comparable.  Maybe the retiree bonds offering a taxable 4% per annum over three years don’t look so attractive!

Proposed Flexibility

This example uses the new proposed flexibility in allowing retirees to access their pension funds and Steve could have presently accessed his benefits in such a manner at any point following his fifty-fifth birthday (although the government is set to consult on increasing this age to ten years before the national state pension age).

Steve could also have made further pension contributions during the following years prior to his retirement.  He would also have the option to spread his income payments over two or more years, thereby maximising his post tax income payments, in effect a series of maturing “bonds”.  The figures quoted above also do not take into account any investment growth that Steve could have achieved on his £10,000 pension pot prior to commencing taking his benefits.

Complex Nature of Pensions

The new rules proposed by the Chancellor serve to highlight the complex nature of pensions and this is something that is not likely to change any time soon!  Advice should always be taken when looking at your retirement provisions so if you wish to discuss the implications of the new proposals please get in touch…

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7 Comments

  • gwen.carman says:

    i would like to know how to go about getting the over sixty five government bond due early 2015 would you please e mail me the information I need to know to purchase one of these bonds many thanks gwen carman

    • Ian King says:

      Dear Gwen,

      The Government are still consulting on the over sixty-five bonds but they are set to be released in January 2015. National Savings & Investments will be providing the bonds and you will be able to stay updated via their website http://www.nsandi.com.

      Regards,

      Ian.

  • a says:

    Hi there! I’m at work surfing around your blog from my new iphone 4!
    Just wanted to say I love reading your blog and look forward
    to all your posts! Carry on the excellent work!

  • Ian King says:

    Hi,

    Thanks for the feedback. We are so pleased that you are enjoying our posts!

  • David Bancroft says:

    To discuss the Bond for pre-retirees should I speak to my bank or an insurance co -say Aviva ?

  • Ian King says:

    Hi David,

    Any personal or stakeholder pension could be used for example to take advantage of the new pension rules. The bond for pre-retirees isn’t a packaged product, it was just an example of how someone could contribute into a pension scheme and receive a healthy return without necessarily taking any investment risk. I hope this helps answer your query?

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