Escape route for grans led into temptation: Vivien Goldsmith pronounces the new Pensioners Income Bond a rather good deal

The new Pensioners Income Bond - inevitably called the 'granny bond' - offers a tempting fixed rate of 7 per cent and an exit route if interest rates start to rise.

The deal is particularly attractive for those with modest sums to invest for income. At the minimum investment level of pounds 500 the bond beats anything on offer from the banks or building societies. An investment of pounds 500 will produce pounds 2.92 a month, and pounds 10,000 a monthly income of pounds 58.33.

Variable rate income bonds pay 6.5 per cent for sums under pounds 25,000. Holders must give three months' notice, and this will not be waived for those who want to transfer to the fixed-rate bond.

The rate is fixed for five years. If rates fall, the investment will stand up. And if rates rise sharply, elderly investors can take out their cash after 60 days' notice and 60 days' loss of interest.

This penalty means that it will not be worthwhile moving for a slight change in rates - a penalty of about 1 per cent of the interest. But for large swings it will be comforting to know that you are not locked in.

The bond, promised by the Government in the Budget to compensate the elderly for their loss of income because of falling interest rates, is available only to the over-65s. Women pensioners aged 60 to 65 will not be allowed to take out a bond. The Sex Discrimination Act means men and women must be treated equally.

Income, paid on the 19th of each month, must be deposited in a bank or building society account. Investors will have to make a declaration about their age and random checks will be carried out to ensure younger people do not take out a bond.

But it will be impossible to monitor any arrangements made between families where an elderly person is 'used' to buy the bond. On death, the bond can be transferred to anyone eligible to hold it, or redeemed without penalty.

There are 8.7 million people aged over 65. About half pay tax. They will receive the interest on the bond gross, but then be liable for tax. Basic rate taxpayers will get a net return of 5.25 per cent.

Tessa, the five-year savings accounts that are tax-free for everyone, usually offer lower rates than the bond.

But smaller building societies such as the Hinckley & Rugby, Dudley and Dunfermline have Tessas with rates well over 7 per cent.

Andrew Longhurst, chief executive of the Cheltenham & Gloucester who caused a rumpus when he claimed the launch of an earlier National Savings product would cause havoc for building societies by taking away funds, gave the pensioners' bond a cool response. 'It's pretty ordinary. I wouldn't put my granny in it.'

David Wormall, marketing manager at Bradford & Bingley Building Society, described it as quite a good deal for those at the lower end of the scale as building societies tiered their interest rates and only those with larger sums received the higher rates.

National & Provincial said all savers could obtain 7 per cent from a Tessa. The society's monthly income five-year bond pays 6.5 per cent on pounds 500, 7 per cent on sums between pounds 10,000 and pounds 25,000 and 7.5 per cent over pounds 25,000.

A spokesman for the Halifax Building Society said: 'The interest rate is not as attractive as we thought it might be, but the maximum investment limits are higher than we thought they might be.'