Retail Bond Expert

Since 2010, private investors have been able to access 'retail bonds' on the London Stock Exchange.

The bond market can seem intimidating to the casual investor. Once you get past the obscure terminology and barrage of statistics, you find that the minimum investment is around £50,000, way out of the range of most investors.

However, there is a more accessible option. In February 2010, the London Stock Exchange (LSE) launched the Order Book for Retail Bonds (ORB), with minimum investments of as little as £1. The word 'retail' means the bonds are available to 'retail investors' – in other words, private individuals as opposed to the big financial institutions that usually buy into bond issues.

Initially, only around 80 bonds were shifted on to ORB, and you could only trade on the secondary market (that is, buy bonds from another investor who had bought them from the issuer). Since then, new issues have been added to the mix, and over 20 of these have been made available to investors.

Retail bonds are issued by big companies like supermarkets, banks and utilities. Some of the most popular issues to date have been an inflation-linked bond from National Grid, which raised £285.5 million in October 2011, and a bond from Tesco Personal Finance paying a 5 per cent coupon that tapped investors for £200 million in May 2012.

Although these sound like large amounts of money, these bonds are hot property among investors. You'll have to monitor the LSE's website upcoming issues and move quickly if you want to get involved. The National Grid bond had originally only looked to raised between £100 million and £150 million, but was overwhelmed by demand and ended up raising nearly double that before closing its offer.

You'll need to buy retail bonds through a stockbroker or an online trading platform.

Retail bonds tend to pay significantly more than you could get through a savings account and in the normal course of events, you'll get your capital back at on maturity. However, there are risks involved.

Although a bond issued by a company like Tesco or the National Grid is pretty safe, in the unlikely event those companies did run into serious financial trouble, there is a possibility you might not get your money back. In contrast, if you have money in a savings account with a bank it will be covered by the Financial Services Compensation Scheme (up to £85,000), so even in the highly improbable event the bank went bust, you would not lose out. The coupon (interest) paid by the bond, usually annually or semi-annually, should reflect the risk. A higher coupon means higher risk.

Another way you could lose out is if you need the money before the bond matures. You can sell the bonds through your broker, but you may find you do not get back what you paid for them. You could also find you get back more – but for investors with limited knowledge of the bond markets, it is probably better to plan on holding bonds to maturity.

As with government bonds, you pay tax on your income from retail bonds, but not on any capital gains. However, any capital gains from bonds are likely to be very small, and zero if held to maturity (since you get back exactly what you paid for the newly issued bonds).

You can avoid paying tax on bond income by holding your bonds inside a stocks and shares ISA.