31 December 2014

Pensioner Bonds available this month (Jan 2015)

The last Budget promised the issue of some National Savings bonds which would be available to those over 65. They inevitably became called Pensioner Bonds. They will be available some time this month (exact date not published yet), but the government have announced the interest rates which will apply.

There will be two issues - a 1-year bond with an interest rate of 2.8% AER, and a 3-year bond with an interest rate of 4.0%. Interest rates are fixed for the term. They are designed to be kept for the whole term, although early withdrawal is possible with the loss of 90 days interest.

The maximum which can be invested is £10,000 in each bond (i.e. £20,000 per person), although they are likely to be over-subscribed so investors may not get the full amount they want.

It's not often that we can say the government is providing market-beating rates, but here they are, hence the expectation that they will be popular,

The tax situation is less than ideal, though. They are taxable, and will be paid back with basic rate tax deducted. Higher or Additional rate taxpayers will need to declare the interest to HMRC, while non-taxpayers will need to reclaim via HMRC - it will not be possible to ask for the interest to be added gross (the R85 form used by banks and building societies will not work). So some people may decide it's not worth the hassle.

29 December 2014

Bonds in your Investment Portfolio

The make-up of a good portfolio can be confusing if your only prior experience is with interest-paying savings accounts. But bonds would normally form a part of most people's balanced portfolio. So what are they?

We're not talking about savings bonds here - they typically pay a fixed rate for a fixed period of time. Nor are we talking about insurance bonds - they are investment products issued by insurance companies and are more of a "tax wrapper" than an investment themselves.

We are talking about fixed interest investments, where a body - typically a government or a company - issue a bond for a fixed term which investors buy. The issuer pays a fixed interest to the investor (hence "fixed interest"), and at the end of the term repays the original value in full. Most retail investors will use fixed interest funds rather than buying a bond directly, so there is no end date since the fund manager will buy another issue when one matures.

There are different types of bond fund, including "gilts" issued by the government, "investment grade" where corporate bonds are issued by more reliable issuers with good credit ratings, and "high yield" bond funds which contain bonds from smaller issuers who are less reliable and so have to offer a higher interest rate to offset that risk.

The enemy of all fixed interest funds is inflation. If you are receiving a fixed percentage from your bond investment but inflation goes up, that fixed percentage is immediately worth less to you, so the market value of that bond goes down.

Rather than managing the inflation threat yourself, an option I often advocate is to buy "strategic bond" funds. These allow the fund manager to invest in a mix of fixed interest investment which can change over time to suit current circumstances.

As always, seek financial advice to find what is appropriate to your circumstances.

5 December 2014

Why the Cap on Long Term Care won't help you

Following the Dilnot Commission which looked into how Long Term Care should be funded, the government implemented a substantially watered-down version. The headline sounds good - a "cap" on care costs, i.e. a limit to what people will have to pay for their care - but if you look under the surface there is very little good news.

Here's an example to illustrate the point.
  • The average cost of being in a care home is £732 per week. (£1,000 a week is common though)
  • Local authorities will contribute, but based on a rate they set (which would correspond to a very low cost, low quality care home). Let's say that's £530 per week.
  • Of that, part covers food and accommodation (the "hotel costs") while part is the care cost. £230 might be the hotel costs leaving £300 for care costs.
  • Only the care costs count towards the headline cost "cap" of £72,000
  • It would take more than four and a half years to reach the cap (£301 per week) - longer than the average time someone spends in a care home (4 years)
  • And even when you reach the cap it only covers the care costs so the hotel costs will still be down to you
Cap? What cap?

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