Midweek Money: The Fixers: Savaged by an old dear

YESTERDAY, AN elderly client of ours, who is perhaps best described as the classic "little old lady" called in at our office. Mrs Dixon was upset because her life-long faith in National Savings products had been severely dented, if not shattered.

"I have just had some National Savings Certificates mature," she started, "and I have been down to the Post Office to find out what the new rate is and I cannot believe it.Do you know they are only paying 3.5 per cent? Shocking!"

National Savings have been the backbone of Mrs Dixon's investments for as long as she can remember. Having reached 75, and needing to reinvest her matured certificates, she suffered quite a shock when she saw what income she would receive.

I tried to be of help: "Have you looked at the Pensioner Bonds? They pay 4.5 per cent."

"I have indeed," she half shouted back at me. "I bought some a few years ago when they were paying 7 per cent, but I still have to pay tax."

"At least you get paid monthly," I said.

"What am I going to do to get a better income?" she demanded.

"Well, if you want to stick with National Savings, the Income Bonds are paying 5.75 per cent gross at the moment, but this is subject to variation, like holding your money in the building society."

"I'm not sure even that is good enough," she replied.

"To be honest," I told her, "I think you are best forgetting about National Savings, because you need a higher income than they are paying and there are products that can help you. There are two areas you should consider. Corporate bond PEPs and with-profit bonds. A whole new range of high-yielding corporate bond PEPs has been launched. Some will pay 8 per cent gross, and because it's in a PEP, it's tax-free."

"That's all very well," Mrs Dixon said, "but won't PEPs lose their tax- free status when ISAs come in next April?"

"There are going to be some changes," I said, "but corporate bond PEPs are still going to be able to reclaim 20 per cent tax, unlike equity PEPs which will only be able to reclaim 10 per cent. So they are still well worth looking at."

"Yes, but they are not nice and safe like National Savings, are they?"

"No, I am afraid these days you are going to have to take more risk to get a higher income, and these corporate bonds offering 8 per cent are going to fluctuate in value."

"I would like to invest with M&G if I can, as they seem very trustworthy," Mrs Dixon retorted. She is not uncommon among investors in having her "favourites" when it came to investment houses. Fortunately M&G have a good high-yielding corporate bond, so I was happy to recommend this PEP.

"I also think you should consider a with-profits bond," I added.

Mrs Dixon said: "I had one of those; in fact I did quite well from it. I think it was with the Prudential."

"Well, the Prudential still offers a with-profits bond and the annual bonus is 5.75 per cent net, so you are getting the same return on the National Savings income bonds and you have no tax to pay. The income can be taken monthly."

"Hmm," she murmured, "that sounds OK but their rates change as well, don't they?"

"Yes, they do set the bonus every year and there is a possibility that if interest rates fall, it will be lower when they next announce it. However, this would result in National Savings income bonds, building society and bank account rates falling as well. Don't forget, you do get a terminal bonus added to your with-profits bond, which you will benefit from when you cash it in."

When Mrs Dixon called back, she had decided to purchase a corporate bond PEP and a with-profits bond.

"I've given up with National Savings and told all the ladies at the WI meeting that there are some attractive alternatives available. Perhaps you'd like to come along and talk to us one evening?"

Tim Cockerill is managing director of the independent financial advisers Whitechurch Securities (0800 374413)