Its a sign of how badthings are for savers that the launch of two new bonds paying up to 4% a year sparked a buying frenzy.
When government-backed National Savings & Investments (NS&I) launched the new pensioner bonds on Thursday, its phone lines were jammed and its website crashed, as it failed to cope with the weight of panic buying.
What did it expect? Hadnt anyone in government noticed how desperate the over-65s are for a decent return on their money?
The new bonds, announced by Chancellor George Osborne in his Budget last March, pay 2.8% before tax over a one-year term, or 4% a year over three years.
The panic buying was driven by the fact that just 10 billion has been made available for the bonds, and at the current rate of demand, that could quickly run out.
You have to be 65 or over to buy the bonds, and can invest a maximum 10,000 in each of them.
But are they really worth the fanfare?
With the average savings account currently paying 0.67%, according to Moneyfacts, it certainly looks like it.
You can get morethan 0.67%if you shop around, but not much more. FirstSave offers a fixed-rate bond paying 1.9% a year for 18 months, but that still falls well short of pensioner bonds.
The income paid by a pensioner bond is taxable, however, so it isnt quite as attractive as itseems.
A higher-rate taxpayer will get 1.68% from the one-year bond and 2.40% from the three-year bond after 40% tax has been deducted.
Virgin Money has just launched a one-year fixed rate cash Isa paying 1.70%. So for a 40% taxpayer, this tax-free return is marginally better.
But thatis the only mainstream savings product on the market that beats pensioner bonds, and then only by a whisker, and only if you are a 40% taxpayer.
So pensioners are right to be rushing into these bonds, because they really do thrash the competition, especially for non-taxpayers and basic rate taxpayers.
The problem is, theywont be around for long. At some point soon, the money will run out. Nobody knows when.
One Other Option
After that, the desperate search for savingsincome will continue.
If youre prepared to take a bit more risk with your money, you can get dividend income of 5% or 6% a year, by investing in the stocks of top FTSE 100 companies.
Household names such as BP, Centrica and J Sainsbury all nowyield more than 6% a year.
Royal Dutch Shell, energy company SSE, pharmaceutical giant GlaxoSmithKline and others yield5% or more.
These are riskier than pensioner bonds, but if youre investing for at least five or 10 years, your return should ultimately be far greater.
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