Inflation beating rates being offered by retail bonds

Published:  21 Feb at 6 PM
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Expat investors tired of searching for fixed rate investments at above their host countries’ current inflation rates are turning to retail bonds for comfort.

Bonds as such are not just the province of the extremely wealthy, as investments can start at the low thousands or ever low hundreds of pounds. Retail bonds are relatively new kids on the investment block, and have gained plenty of fans over the last several years.

Put simply, retail bonds are fixed-term loans to an established company at the offered interest rate, with capital repayment in full at the end of the term. Regulated and issued by the London Stock Exchange, the downside is that they do not fall under the Financial Services Compensation Scheme, meaning that, should the company fail, investors lose their money without redress.

UK companies such as Severn Trent Water, Lloyds Bank, Tesco and the UK National Grid have issued retail bonds and, between them, have raked in hundreds of millions in new investments as a result. Fixed terms offered are usually five or six years, and rates vary between 5 and 6.5 per cent, with a minimum investment of around £2,000.

Retail bonds are able to be traded on the LSE, although the market is at present limited and sales may be ‘premium to par’, meaning that a capital loss could be made. However, the facility is useful if emergency liquidity is required.

Tax advantages available if retail bond purchases are ‘wrapped’ via an ISA or pension include tax-free income and no capital gains tax if the bond is traded profitably before its maturity date. Until now, no LSE-traded retail bonds have been subject to default, although the market has only been open since 2010.

During its three years, investors have seen 30 issues, mainly in the banking, property and financial services sector plus a few major retailers including Tesco. Many of the offerings have been enthusiastically received, selling out well before the offer’s closing date.

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