17th Feb

Savers Turn to Bonds For Inflation Beating ISA Returns

With only six weeks left to make use of the 2012-2013 ISA allowance, savers and investors are increasingly considering retail bonds as a way to achieve above-inflation returns.  

Whilst some investors enjoy the relative sanctuary of a cash ISA the current limits are half that of a Stocks and Shares ISA whilst returns are typically somewhat lower than inflation, when measured by the Consumer Price Index (CPI) which currently stands at 2.7%.

Last week Nationwide building society launched a four-year-fixed-rate ISA which, with a return of 2.7%, at least offers wealth preservation, but those seeking to commit for a shorter period will see the real value of their investment eroded; Halifax offers a two-year-fix 2.5%, whilst Metro Bank’s one-year fix delivers just 2.25%

Those investing in instant access cash products will get even shorter shrift – data analyst Moneyfacts reports that the average cash ISA rate is now just 1.79%, down from 2.41% six months ago and 5.29% in 2008. 

Funding for Lending

Industry commentators believe that one of the key factors underpinning this lacklustre ISA season is the impact of the Funding for Lending scheme which has made banks less reliant on deposits to underpin mortgage lending, and therefore competition for investment is less keen. 

As a result, savers are increasingly turning to retail bonds where products that mature after five years or more are eligible to be held both within ISA and SIPP wrappers. As retail bonds can be bought by Stocks and Shares ISA which have a limit of £11,280 for 2012/13 investors have an opportunity to not only outperform Cash ISA but also invest far greater sums in tax advantageous products.

Whilst carrying more risk, debt products such as the current offer from buy-to-let lender Paragon offer relatively attractive rates of return. Paragon’s unrated bond returns 6% p.a. via twice-yearly coupons up until maturity in 2020. 

Investors in these bonds are effectively lending money to the issuing company and risk losing some or all of their investment if the company should fail before the bond matures. 

Bonds with a shorter time to maturity are considered to expose the investor to less credit risk, and as these products are traded in the secondary market via the ORB exchange, investors may prefer a shorter dated product such as the ICAP 2018 bond, whilst accepting the slightly lower return of 5.14% p.a. 

Those considering investing their ISA allowance in bonds should ensure that they understand the structure of the products that are on offer, the risks they are exposed to and the protection that is afforded.  

Investors should take qualified financial advice as appropriate and can choose from a range of distributors that vary in terms of the levels of support they provide and the charges they levy. (See - How to.... Retail Bond Expert

Retail Bond Expert would like to hear from users who have used some or all of their ISA allowance to purchase retail bonds in the past, and would like to hear your experience in terms of the comparative returns you have achieved, and your experience – in a positive or negative sense – when you have attempted to set up an account and purchase.  

Your experience will help others to avoid the pitfalls and find the most positive way to invest in retail bonds in the future. 


Posted on 20/10/2013 08:36:51

NoThe only way you would pay $1000 commission on a bond sale is if you boghut $500,000 of bonds or more.Bond commission is usually charged as a percentage of the whole deal.IF you deal exclusively online, your broker should have a commission sheet that deals with corporate bonds, government bonds, foreign and domestic, etcThere are many good sites that tell you about pricing bonds, it is mainly high school math applied to money instruments

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