The cost of a comfortable retirement has soared, and many pensioners are concerned that they will suffer a savings shortfall in later life.
The best way for younger savers to boost their future retirement income is to increase their pension contributions . However, the situation is more challenging for those who have already hit retirement age.
Older savers may have given up work already and accessed their retirement pot, with limited ability to grow their pension savings any further. What’s more, they may feel uncomfortable exposing themselves to too much investment risk at a stage of life when they need to start drawing from their retirement pot.
The good news for retirees, though, is that interest rates are currently high – which means they can earn a decent income from cash and short-term bonds.
These assets are often deemed “risk-free”. This is because cash deposits and some fixed-term savings bonds are protected up to the value of £85,000, as long as the provider or bank in question is covered by the Financial Services Compensation Scheme .
Several providers on the market offer fixed-rate bonds which pay monthly income. These can prove beneficial for older savers who want to supplement their pension income.
The fixed-rate nature of these products also means pensioners have the security of guaranteed income over the lifetime of the loan. The latest provider to announce a product like this is Skipton Building Society.
Skipton’s three-year fixed-rate bond is targeted specifically at retirees – you have to be 66 or over to buy the product. It pays a rate of 4.25% to new customers, and 4.50% to existing customers, although this is not a market-leading rate .
The rate is locked in for three years (but you have to be willing to lock your money away too). Any income is paid into a bank account of the saver’s choice on a monthly basis.
We look at how the product stacks up against competitors. Can it help pensioners boost their retirement income , and is it any good?
How does the rate on Skipton’s bond compare to others?
Skipton’s three-year income bond pays an interest rate of 4.25% to new customers and 4.5% to existing customers. This rate is fairly competitive.
Currently, the highest three-year rate on the market is 4.85%, according to Moneyfacts. However, it’s worth noting that the interest on this bond from provider UBL UK is paid on maturity.
Meanwhile, the Skipton bond pays income on a monthly basis – a good arrangement for some retirees who are looking for regular payouts to help fund their lifestyle once they are no longer earning a salary.
While Skipton offers a good rate, particularly if you are an existing customer, it is not the highest-paying option on the market for those looking for monthly income either. RCI Bank pays 4.66% (gross).
“It’s fantastic to see Skipton Building Society reward its loyal customers, particularly those with the society for the past couple of years, with a rate boost on its three-year fixed income bond,” says Rachel Springall, finance expert at Moneyfacts.
However, she notes that savers who don’t need the money on a monthly basis could get a better deal by choosing a bond that pays interest on maturity. “With this in mind, consumers need to decide how and when they want to receive their savings interest before applying,” she says.
Springall adds: “Some savers might be comfortable to forego a market-leading rate to get regular interest payments into their bank account, and fixing for three-years may appeal to those who feel interest rates are going to come down in the next few months.”
Top rates on three-year fixed-rate bonds with monthly income
As you can see from the above table, Skipton’s rate for existing customers (4.50%) comes in fifth. Its rate for new customers is slightly lower, and comes in 11th.
How much could a savings bond boost your retirement income?
“Customers who save the maximum £25,000 into this bond from day one will benefit from £88 income each month or over £1000 per year,” says Alex Sitaras, head of savings and partnership products at Skipton Building Society.
This figure is based on the rate for new customers, who are entitled to 4.25%.
Of course, if you are in a position where you don’t need the monthly income to supplement your pension, you could opt for a different bond which compounds your interest rather than paying it out.
Albert Einstein famously called compound interest the “eighth wonder of the world”. Over time, it can have a multiplier effect on your money by earning you interest on interest.
Is now a good time to fix your savings?
The Bank of England is currently holding interest rates at a 16-year high of 5.25%, but it is expected to cut the base rate later this year – potentially as early as 1 August.
This means there is only a short window of opportunity for savers to lock in higher interest rates before they start to come down.
While some of the best easy-access savings accounts currently offer rates north of 5%, a fixed-rate account could end up being the better option once easy-access rates start to tumble.
Of course, you will need to be happy to lock your money away for the full term of the loan. Emergency funds or money that you need to access in the short-term for a particular goal should be kept in an easy-access account.
If you are a younger saver who is willing to lock your money away for a longer period (three to five years or more), investing could be a better option for you.
Investment returns almost always beat cash over the long-run, as long as you invest in a diversified range of stock market investments, manage risk appropriately, and keep your money in the market for a sufficient period of time (to ride out any short-term volatility).
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