Bonds

Pros and cons of fixed-rate bonds for pensioners

· 5 min read

There are many different suitable places for pensioners to put their funds, despite them having a particular range or needs and requirements - mainly influenced by their short investment timeline.


There are many different suitable places for pensioners to put their funds, despite them having a particular range or needs and requirements - mainly influenced by their short investment timeline.

Here, we look at the pros and cons of a fixed rate bond as a suitable investment type for pensioners. However, while fixed-rate bonds are an appropriate investment vehicle for many pensioners, it does not necessarily mean that they are ideal for all pensioners. Read our pros and cons below with your circumstances in mind to see whether it is the right product type for you and your needs.

What exactly is a fixed-rate bond?

A fixed-rate bond is a type of investment whereby you lock away your cash for a predetermined amount of time and receive a set amount of interest over that term. While variable-rate bonds exist, a fixed rate bond is one where the interest rate will not change for the entirety of the bond’s life.

Fixed-rate bonds are available from many different banks, building societies, and companies. The main feature to be aware of with regards to fixed-rate bonds is that your money will be locked away for the duration of the bond’s term. If you want your money back, you will most likely incur high penalties from the bond issuer.

Potential benefits of fixed-rate bonds for pensioners

Lump-sum

For many, one of the most significant advantages of fixed-rate bonds is that you can invest a large amount of money. With some interest-bearing savings accounts, like a Cash ISA, there is a set upper limit on what you can invest. Given that some pensioners may have large amounts of money saved, any low upper limits may still leave them with the need for suitable places to invest their cash. In direct comparison, some fixed-rate bonds can be for as much as £500,000.

Known interest

Perhaps one of the most essential steps in finding suitable places to invest your cash as a pensioner is preparing a budget. What is great about fixed-rate interest bonds is that they can help you budget more easily given that there will be a set amount of interest earned over the lifespan of the bond.

High interest

Historically, fixed-rate bonds offer a higher amount of interest than other easy access savings accounts. This is as compensation for locking away your cash for an agreed amount of time at the start of the bond’s life. If you can afford to lock away your money, fixed-rate bonds can be a great way of topping up your pension income.

Steady income

Depending on the bond, you can use the interest as a form of income. Some bonds will pay annually; others will pay at the end of the bond’s term. If it is the former, you can therefore expect an annual payout that you can then either use as income or reinvest elsewhere.

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Tax-free

Depending on your circumstances, you may even be able to have a tax free income stream from a fixed-rate bond. Maximising your income is of the utmost importance to a pensioner given the finite resources available in your retirement. So, if you have not used up your Personal Savings Allowance with the rest of the gains made on your investment portfolio, you won’t have to pay tax on the interest earned with a fixed rate bond. The Personal Savings Allowance is £1000 if you are a basic rate taxpayer and £500 if you are a higher rate taxpayer.

Safe

The last benefit of a fixed rate bond is perhaps one of the most important, particularly for pensioners. Given that you are no longer earning a salary, it is vital to protect what cash you do have. Fixed-rate bonds are seen as a relatively low-risk investment where you are not likely to see a fall in your original investment amount. The reason being is down to how bonds are structured within the companies that issue them. That structuring means bondholders are the first in line to recoup their investment over shareholders, should the bond issuer go into administration.

Potential Downsides of Fixed Rate Bonds For Pensioners

Limited upside

While it is great knowing that you should be able to recoup your investment as well as earn a certain amount of interest, a significant disadvantage to fixed-rate bonds is that there is a limit on how much interest that they can earn. Stocks and equity-based products have unlimited upside so you can see more significant returns with other investments if you choose the right stocks. So if you have a substantial shortfall in your retirement budget, fixed-rate bonds may not be the right choice for you.

Locked away

The biggest drawback for anyone opening a fixed-rate bond, but particularly for pensioners, is that your money is locked away for the entire term of the bond. The reason that this is such an acute problem for pensioners is that they may need those funds given that they are no longer earning a salary.

Reinvestment risk

Another reason that having your money locked away for a set time is that you run the risk of not being able to make a better investment further down the road. Markets fluctuate a lot which impacts the amount of interest offered on bonds. It could be that bonds with the same timeline earn more interest when offered a few months later.

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High deposit amounts

While you can open many other savings accounts with as little as £1, fixed-rate bonds typically require four-figure sums. This may prevent some pensioners from being able to purchase a fixed rate bond from the outset.

Are fixed-rate bonds a suitable investment for pensioners?

Fixed-rate bonds are often suitable for pensioners. The benefit of knowing your money will not lose (real) value is essential, plus you can earn a decent rate of interest if you shop around for a bond with a term you are comfortable with. However, locking your cash away at all may not be a suitable option for you depending on your circumstances. It is perhaps this point alone that may stop fixed-rate bonds from being a convenient place for pensioners to invest their hard-earned cash.

Rachel Lee
Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel naturally started to move towards investment writing more and more in her day job. Rachel now works as a full-time business and financial writer - drawing from her hands-on experience in the field.
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