It can often be difficult for older people to find a financial product they can invest in and that can give a good return on their savings. For this reason, National Savings and Investments recently introduced a guaranteed growth bond for people in the UK aged 65 or over. The bond has already proved hugely popular, so much so that once it was launched the website crashed due to the high demand but what are the main advantages and disadvantages of the product? This article will highlight some of the pros and cons.
The main advantage is the increased rate of interest that it offers. People investing in this type of bond will receive 2.8% gross if they leave their money in the account for a one-year term or an enhanced rate of 4.0% gross if the money is left in the account for three years.
To invest in a bond, a saver will need at least £500 and it must be paid in as a lump sum. This is a lower investment than required for some bonds; others require an investment of at least a £1000.
Interest is paid at a fixed rate so the investor knows exactly how much they will get at the end of the term, whereas with a variable rate bond, there is no way of knowing whether or not the investment will go up or down.
A Pensioner Guaranteed Growth Bond can provide an extra income, but the extra interest earned won’t be available until maturity.
While the money can be withdrawn early if an individual wishes to, there will be a penalty for doing this. This could prove to be costly as the investor would lose 90 days’ worth of interest if they wish to get their money out early.
Interest paid on maturity
Another disadvantage of the Pensioner Guaranteed Growth Bond is the interest is only paid on maturity. For this reason the bond would not be suitable for someone that wants to use it as a way of earning an additional monthly income.
An important aspect to consider is the tax implications. Unlike ISA’s, the interest earned on a Guaranteed Growth Bond is taxable, which means that the money will have to be declared to the HMRC.
Although the fixed rate of interest is beneficial for many people, if the interest rates change the investor will remain locked in at the same rate as when they first opened the account, meaning they will miss out on the enhanced interest rates.
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