Retail Bonds Offering Inflation Busting Returns

British investors are showing a huge appetite for retail bonds that offer inflation busting returns that easily beat interest rates offered by savings accounts.

Bonds are not just for the hugely wealthy – with investments starting from a few hundred or few thousand pounds, they are easily accessible to any investor.

For investors new to retail or corporate bonds, here are some answers to frequently asked questions:

What is a retail bond?

Forget the technical jargon about bonds and coupons, simply put a corporate bond is a loan agreement between you and a company.

You lend the company ‘x’ amount of cash for a fixed term in return for regular interest payments and the repayment of all your cash at the end of the term.

What sort of rates do retail bonds pay?

They vary, but many are around 6% or even more. The rates are fixed term – often five or six years, so with the spectre of interest rate rises on the horizon, it’s wise to check that the rates offered by the issuers won’t be outpaced by rate rises making other savings and investment products more attractive than they have been in recent years.

What about tax?

If you ‘wrap’ or buy your retail bond through an ISA or pension, the income is tax free and no capital gains if you make a profit trading the bond before maturity area taxed either.

Who is offering retail bonds?

Companies like Tesco, Lloyds Bank, Paragon Mortgages, the National Grid and Severn Trent Water have raised hundreds of millions between them.

Are retail bonds regulated?

Yes and no. The bonds are issued and regulated by the London Stock Exchange (LSE) but fall outside the Financial Services Compensation Scheme. This means if the company should default on the bond, investors lose their money and have no redress to a compensation scheme.

So far, no bonds on the LSE market have defaulted, but the market has only been open three years and seen 30 issues, mainly in banking, financial services and property sectors.

How much are retail bond investments?

The typical minimum investment is £2,000 and then additional blocks of £100 or £1,000, depending on the bond issuer.

Can I get money back early?

Yes. Bonds listed on the London Stock Exchange are traded like stocks and shares. However, the market is smaller and they could be difficult to sell. They may also sell at premium to par, which means the buying price could be less than you paid, leading to a capital loss.

How do I buy retail bonds?

The London Stock Exchange has a listings page which includes a link offering more information about the bond and the stockbroking firms and platforms selling or trading them

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