So you want 6 per cent interest? Go and bag yourself a retail bond

 

Shopping around for accounts offering decent interest rates is arduous at the best of times, but there is now an easier way to make your money work harder for you.

Retail bonds – relatively new products to come to market – are flying off the shelves. And with issue periods ending early due to demand, look sharp to snap up these bonds while offers last.

Names like Tesco, National Grid and Severn Trent have launched retail bonds as a way for them to borrow money, giving you the chance to earn attractive interest of around 5 or 6 per cent a year.

The bonds, which you can typically access with a minimum of £1,000, sometimes less, have a maturity date of around five years or more from issue, when they are due to pay back your original investment.

At a time when interest rates are languishing at 0.5 per cent and equity markets are choppy, these bonds offer a viable halfway house, giving you a decent return without a lot of risk.

"Most deposits are paying very low rates – sub 1 per cent in some cases," says Mark Glowrey at Canaccord Genuity. "Although some banks offer 3 per cent on deposits, this can be an introductory deal which drop to less generous rates."

And while British investors have long had a love affair with equities, these have become pretty volatile in recent years. "So the time is right for a re-emergence of bond investing," adds Mr Glowrey.

Although not necessarily a substitute for savings products, as they are riskier, the bonds can be a way of getting returns on cash that might otherwise be earning nothing. "Our clients are moving more money into these to make their cash work harder," says Alastair Thaw at Barclays Stockbrokers. "We are seeing a significant increase in business in this area," he adds.

"It had a slow start in 2010 but picked up in the second half of 2011. The number of bonds issued has risen substantially, as has clients' interest."

Although retail bonds existed in a different guise decades ago, they were launched in their current form on the London Stock Exchange at the start of 2010. In that year, they raised £230m from new issues, followed by £1.25bn in 2011 and £913m this year.

Just last week, the LSE closed its own retail bond six days earlier than planned, due to strong demand. Its bonds, the first from the exchange made available to retail investors, last for nine years and pay 4.75 per cent annually.

"The key benefit is that the interest is fixed," says Peter Day at stockbrokers Killik & Co. "The biggest grumble I hear is that interest rates fall on money on deposit with a bank from an initial 3 per cent to under 1 per cent, whereas a bond's rate cannot be cut."

Once you've bought bonds you're not trapped – you can sell before they are due to expire if you need to. To buy go via a broker in the same way you would with shares. The bonds, not subject to stamp duty, can be put in an individaul savings account or self-invested pension plan if they have at least five years to maturity.

With interest rates unlikely to rise soon, the queue for retail bonds is only likely to get longer.

Emma Dunkley is a reporter for Citywire.co.uk

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