Keep your sights fixed on safe returns in retirement

The fact that the Bank of England base rate has remained unchanged at 4 per cent for more than a year ought to be good news for savers - particularly those who rely on interest from savings to boost their retirement income. But the unwelcome news is that some savings rates have actually been falling, accord ing to independent research by MoneyFacts. Although savers with money in 'base-rate tracker' accounts which guarantee to pay a (small) percentage over base rate have largely seen the benefit of stable interest rates, those with accounts that pay a variable rate of interest have not.

For example, financial research organisation MoneyFacts reports that both Abbey National and Bristol & West are one step ahead of the Bank of England's Monetary Policy Committee (which on Thursday decided to keep the base rate unchanged) and cut interest rates on some of their variable-rate accounts by 0.25 per cent before Christmas. The Coventry Building Society appears to have forgotten its own 'tlc not plc' slogan by reducing the rate of its NetSave account twice: first by 0.1 per cent and then by a further 0.3 per cent.

But while there seems to be a downward trend in variable rates, MoneyFacts says that many fixed rates are on the up. So is this a good time for savers looking for the security of cash investment and the certainty of a guaranteed return to turn to fixed-rate products? It could be if variable rates either stay the same or fall, as Colin Jackson, director of independent financial advisers Baronworth Investment Services, predicts. Anna Bowes, savings and investments manager at IFA Chase de Vere, wouldn't recommend that investors put all their money in fixed-rate products but says they are an attractive proposition for people - particularly pensioners - who want an element of certainty to their savings income.

Jackson and Bowes agree the most important thing for anyone thinking of entering the fixed-rate market is to get the best rate possible. So what are the options?

The main attraction of the 1, 2 and 5-year guaranteed pensioner bonds from National Savings & Investments (NS&I) - available only to those aged 60 and over - is the fact that, because NS&I is backed by HM Treasury, money invested in them is 100 per cent safe. Jackson 'wouldn't touch them with a bargepole' because the rates are a decidedly uncompetitive 3.45 per cent for the 1-year bond, 3.65 per cent for the 2-year offering and 4.05 per cent for investors willing to tie up their money for five years. Higher-rate taxpayers should steer well clear since the rates after tax are lower than target inflation (currently 2.5 per cent), which Bowes says is the rate you should aim for as a bare minimum.

Over one and two years, all types of taxpayer who have at least £2,000 to invest will do better with the fixed-term deposit from the Co-operative Bank, which pays monthly interest of 4.21 per cent for the one-year bond and for the two-year, 4.34 per cent. Over five years, investors with a minimum of £5,000 can improve on NS&I rates with the 5-year fixed-rate bond from the Capital One Bank (0800 085 0011) which pays monthly interest at a rate of 4.81 per cent. An alternative is the fixed-rate product from Birmingham Midshires (0800 169 1543) which pays 4.79 per cent and requires a minimum investment of only £1,000.

For up-to-date rates, call the Chase de Vere Investments Moneyline (0845 609 2001) or go to www.moneyfacts.co.uk.

Guaranteed income bonds


They're not suitable for non-taxpayers - and those whose top rate of tax is the starting rate of 10 per cent - because interest on guaranteed income bonds (GIB) is paid with tax already deducted and it can't be reclaimed. But both basic and higher-rate taxpayers who have at least £5,000 to invest should compare the fixed rates from banks and building societies with those offered by a limited number of life insurers on GIBs.

These work in much the same way as fixed-rate bonds from banks with one important exception: although you are guaranteed to get back the whole of your capital when the bond matures, you may get back less than you put in if you pull out early.

GIBs can be a good deal for higher-rate taxpayers because they are taxed slightly more favourably. With bank and building society bonds, higher-rate taxpayers have to pay a further 20 per cent in tax whereas with GIBs, they have to pay only an extra 18 per cent.

However, this tax advantage doesn't translate into better net returns unless you're a higher-rate taxpayer with substantial amounts to invest and you plan to fix for more than a year. Chase de Vere is offering Cash readers a free factsheet on GIBs - which explains the tax rules in more detail and explains how to compare net GIB rates with the before-tax rates on bank and building society bonds - call 0845 300 4517 or order at www.chasedevere.co.uk. Baronworth will supply a free survey of GIB rates if you call 0800 5878 66639.

An income for life


In the past, one option for boosting retirement income for people over 70 was to buy a 'purchased life' annuity. But despite their favourable tax treatment - unlike pension annuities, part of the income is tax free - Peter Quinton of the Annuity Bureau says that nobody is buying them.

What is proving very popular, according to Danny Cox, Pensions Development Manager at discount brokers Hargreaves Lansdowne, is an 'immediate vesting' pension. This is where you pay into a pension and then almost immediately use the pension contribution plus the tax relief added by the Inland Revenue to buy an annuity, after taking a quarter of the total amount as tax-free cash.

The downside is that you don't get your capital back, but for people who are prepared to live with this, the upside is the rate of return. A 65-year-old man can get a fixed rate of nearly 9.5 per cent for the rest of his life. A woman of the same age would get just over 8.5 per cent.

Hargreaves Lansdowne offers an immediate vesting pension through Standard Life. It is open to anyone aged between 50 and 75 who is not making contributions to any other pension. The minimum investment is £2,808, of which £900 will be returned when the annuity is purchased. For more details, phone Hargreaves Lansdowne on 0800 138 5838.

Case study

Aubrey Goldstein, an 80-year-old from North London, invested in a three-year guaranteed income bond from AIG for two reasons. First, it was important for him to know what he was going to get each month and second, the AIG bond was paying the best rate for the £60,000 he had available to invest.

The bond gives him an after-tax rate of 5.81 per cent and Aubrey uses the monthly income of £283.37 to supplement his state pension and the modest occupational pension from his time as the manager of a builders' merchant. It also comes in handy for buying presents for his 10 grandchildren and nine great-grandchildren.

When the bond matures in January 2003, Aubrey, who has lived alone since his wife died four years ago, plans to go for another fixed-rate investment but says 'at 80, it doesn't seem sensible to fix for more than three years'.

Whether he chooses a guaranteed income bond again will depend entirely on 'whichever investment is paying the best rate'.