Binding yourself to local bonds means losing cash

Most local authority IOUs are like civil servants: dull, but reliable. You can get higher returns elsewhere

Local authorities are there to clean the streets, collect your rubbish and charge you too much for council tax. Few people realise several authorities also issue investment bonds that allow you to earn a fixed rate of interest for minimal risk.

Local authorities are there to clean the streets, collect your rubbish and charge you too much for council tax. Few people realise several authorities also issue investment bonds that allow you to earn a fixed rate of interest for minimal risk.

Several years ago, local authority bonds were relatively big news, used by tens of thousands of investors. Local authorities issued them as a way of borrowing money to help pay for local services, in the same way as the Government borrows money by issuing gilt-edged securities or private companies raise money for expansion through corporate bonds.

"The money raised has traditionally gone on paying salaries, running local services, instigating witch-hunts and all the other things for which local authorities are renowned," says Martyn Page, head of research for Countrywide Independent Advisers.

The bonds pay a fixed rate of interest for a set term, and are serviced from income earned from council tax payments. They have typically been used by cautious investors, who see them as a low-risk source of interest because they are backed by the local authority, and by implication central government.

But the price you pay for higher security is a meagre return, especially in these days of low interest rates. "You could do much better elsewhere for only a marginally higher level of risk," says Mr Page. Typical bonds are issued for between two and five years, and pay interest every six months. Minimum investment is between £500 and £2,000, with no maximum. Rates change regularly, but Moneyfacts show that at the end of February, Pembrokeshire county council was paying 4 per cent on bonds fixed for between two and four years, and North Ayrshire was paying 5.25 per cent for between three and six years. These are low, but still ahead of inflation, and your original capital is guaranteed. Rates are similar to those paid on government gilts, which have a redemption yield of around 4.8 per cent for terms of less than five years.

National Savings, much criticised for its falling savings rates, does little better, paying 4.9 per cent fixed for two years on a minimum £500 on its Pensioners Bonds Series 9.

"You can get a much better rate by investing in another relatively safe investment, corporate bonds from large, sturdy businesses such as Abbey National and Tesco," says Mr Page. "These are sold through stockbrokers and pay between 6.5 per cent and 7.5 per cent."

Other options include put-ting your money in a fixed-rate bank or building society account. Bristol & West pays 6.1 per cent on £500 or more invested in its Easy Plus account, fixed until 25 October 2001, shows Moneyfacts, and Providian National Bank pays a similar amount on £5,000 or more invested for between one and five years in its fixed rate bonds.

The highest rate you can get is through a cash Isa. Internet bank Smile pays 6.75 per cent on £1 and above, and Chelsea Building Society pays 6.5 per cent on £10 and above. These rates are variable and will almost certainly fall, if interest rates are cut further, as many expect.

The other drawback with local authority bonds is that they are increasingly rare. They are offered by only eight local authorities, and two of these, Blackpool and Sefton, are bowing out. The others are not seeking new business with enthusiasm. Nottingham city council still offers bonds to more than 3,000 savers. Six years ago, there were 20,000, when its rates were more competitive. Peter Guest, the treasury management officer, says bonds are no longer the best way for authorities to raise funds. "We can access fairly cheap rates through the Public Works Loans Board, and now we offer bonds as much as a service as a source of raising money."

The council pays 4.25 per cent on bonds fixed for between two and five years. Many of those buying the bonds are elderly investors who have been saving with their local authority for years. "They feel safe with us, and they can visit to talk to us about their investment, which gives them the human touch," says Mr Guest. "It is also more straightforward than setting up a postal, telephone or internet-based savings account, and if you want a safe home for your money for a couple of years, you could do a lot worse.

"Local authority bonds are as safe as you can get because the government would effectively step in if the local authority ever got into financial difficulties. It is hard to choose between local authority bonds and gilts for overall security. Most of our investors save relatively small amounts. We have nothing bigger than £25,000, which is probably a good thing, because with this amount you should be able to get much better value for money elsewhere."

Gordon Whitehead, principal accountant at Oldham metro-politan borough council, says bonds are a service to the community. "We offer bonds to those who want them but we don't tout for business. We still have several hundred thousand pounds invested, but we are not looking for a flood of new inquiries." The other authorities offering bonds are Torfaen council in Wales, and High Peak borough council.

But if you have money in a local authority bond, do better by switching when the investment term expires. Unless security is more important than getting the best return.

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Research Analyst - Recruitment Resourcer

    £18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

    Senior Analyst - Financial Modelling

    competitive: Progressive Recruitment: This really is a fantastic chance to joi...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Day In a Page

    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform