How good is that bond?

By STEPHEN WOMACK
Updated: 19:00 EST, 7 June 1999

National Savings says its bond offering a new deal for pensioners has attracted thousands of enquiries since its launch last week. But it faces tough competition.

The bond is meant to put National Savings back on the map for pensioners. The government-backed body has been under fire for giving savers poor value over the past year.

It pays a guaranteed 5% gross of tax for two years. It is available only to people aged 60 or over and complements National Savings' five-year pensioners' bond, paying 4.85% gross a year. Income is paid monthly.

It was launched after Chancellor Gordon Brown, responding to concerns over falling interest rates, told National Savings to offer pensioners greater choice.

The bond is not free of tax but pays interest without tax deducted. This appeals to non-taxpayers who do not have to bother with paperwork for tax refunds.

Taxpayers need to declare income from the bonds to the Inland Revenue.

'They appeal to conservative investors who do not want to take any risk with their money,' says Vivienne Starkey of London-based independent adviser Haddock Porter Williams.

'The rate on the two-year bond is competitive and it seems National Savings is making an effort to do better.'

Starkey stopped recommending National Savings products because rates dipped so low. But she says she may consider the new pensioners' bond.

Investors may take out some or all of their money before two years with 60 days' notice. But they sacrifice interest on the withdrawn money for the notice period. Each pensioner may invest up to £50,000.

It may well pay older people to investigate alternative investments before committing savings to the new bond.

The nearest alternatives are fixed-rate offers from banks and building societies. Woolwich pays 5.13% gross monthly interest on its fixed-rate bond, with a £500 minimum investment. Norwich & Peterborough building society's fixed bond pays 5.37% gross over two years, though the minimum investment is £5,000.

Another option is guaranteed income bonds offered by insurance companies. Those with substantial sums to invest may certainly find a better deal. But they are suitable only for taxpayers because interest has to be paid net of basic-rate tax.

AIG Life pays 4.12% net on two-year investments over £25,000 and 4.21% net on £40,000 or more. Countrywide Assured offers 4.2% net for two years on £20,000 and 4.3% net on £50,000 or more. Money is tied up for the duration of the bond.

If income is a priority savers can do better in the short term with a variable-rate account. But that will be offset if interest rates continue to fall. 'I would expect at least one more cut in rates in the next few months,' cautions Starkey.

Variable-rate best buys include a phone account from Lombard Direct, paying between 5.35% and 5.75% gross with instant access, Yorkshire building society's 30-day notice account with rates of 5.65% to 5.94% gross, and Standard Life bank's 50-day notice account paying between 5.41% and 5.84% gross.