Name's bond, income bond

Bonds can cut the risk and deliver a decent return

Investors looking for income are often baffled by the wide choice. Some products are relatively familiar, such as National Savings certificates, but corporate bonds and with-profits bonds can seem more daunting.

Investors looking for income are often baffled by the wide choice. Some products are relatively familiar, such as National Savings certificates, but corporate bonds and with-profits bonds can seem more daunting.

But you don't have to stick with the tried and tested. With low interest rates hitting income from investments you should explore every opportunity to boost returns.

You might also have to accept a higher level of risk than a few years ago, says Justin Modray, investment adviser with Chase de Vere. "To get a good return for low risk is very difficult. Bank and building society deposit accounts have traditionally been safe vehicles but even the best pay no more than 6 per cent income, without capital growth."

Corporate bonds are an increasingly popular option, offering an alternative to the bumpier, but potentially more rewarding, stock market. Corporate bonds are loans issued by companies to raise money for their expansion. They pay investors a fixed rate. The risk you take is that the company may default on its payments, but this can be reduced by spreading your money across a variety of companies using a corporate bond fund. "These pay between 5 and 6 per cent gross income with a reasonable chance of capital growth," says Mr Modray.

Bonds are traded like shares, and their price can rise and fall depending on how attractive the income they pay looks, compared to cash or shares. Returns are variable but can rise to as much as 9 per cent. "There has been a proliferation of high-yield bonds such as M & G Higher Yield and Fidelity Extra Income," says Mr Modray. "These are attractive rates, but they invest in smaller companies with a greater chance of defaulting."

Guaranteed income bonds are also more popular, because they allow exposure to the potentially higher returns of the stock market, while protecting your initial capital. "They give you a high guaranteed rate of interest for three to five years and return your initial capital, provided the stock market index has not fallen," says Mr Modray. "They are attractive, simple and give a greater level of income than savings accounts. The downside is that if the stock market has fallen at the end of the term, capital will be reduced."

The Scottish Mutual Income Bond pays 8 per cent net income for three years and returns your original capital if its chosen index, the Euro Stoxx 50, is no lower at the end of the term. The NPI High Income Bond pays 8.25 per cent annual income with a full return of capital, again provided the Euro Stoxx 50 has not fallen over the three-year term.

Many advisers are wary of three-year bonds because it may not be enough time to make good any stock market fall. With-profits bonds, sold by insurance companies, are another way of tapping into stock market returns while reducing the risk of a crash or correction eating into your savings. Gains on the bonds' investments are shared out to policyholders each year. Once declared, these bonuses cannot be taken back, protecting you from future stock market falls. Your original capital is also protected.

Martyn Laverick, marketing director with Chartwell Investment Management, says: "Annual bonuses are typically around 5 per cent net which can be taken as income." A final, larger payment, called a terminal bonus, is paid to policyholders during the term of the bond or when it is cashed in.

Mr Laverick says the Prudential with-profits bond, which pays a bonus rate of 5.25 per cent and a terminal bonus of 2.75 per cent, remains the most popular, followed by Norwich Union and Scottish Widows.

Basic-rate taxpayers pay no further tax on the proceeds from with-profits bonds. However, with-profits bonds pay advisers up to 5 per cent commission, which comes out of your pocket. But this can be greatly reduced by buying on an "execution-only" basis through companies such as Chartwell or Financial Discounts Direct. You should keep some part of your portfolio as cash to reduce exposure to risk and keep a source of accessible funds.

You can take the interest free of tax by putting your cash in an individual savings account (ISA), which allows you to invest £3,000 in cash this financial year (£1,000 in future years). Rates of around 6.5 per cent are available, but these may fall.

You can also invest up to £7,000 this year (£5,000 thereafter) in a stocks and shares income-bearing ISA. Returns vary greatly according to investment performance, but in the 12 months to November a £1,000 investment in Jupiter Income would have risen to £1,221. If you took all this as income it will have paid 22.1 per cent. You should put only part of your funds in the stock market because of the greater risks.

The rates of National Savings have recently improved. Mr Laverick says: "Its index-linked certificates are now worth a look, especially for higher-rate taxpayers." The index-linked five-year certificate (16th issue) pays the inflation rate, plus 1.8 per cent a year tax free, if you tie your money up for the full term. Its index-linked two-year certificate (1st issue) pays inflation plus 2.5 per cent.

Chartwell, 01225 446556; Financial Discounts Direct, 01420 549090

PROMOTED VIDEO
News
video
Life and Style
tech
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
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
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