Savings interest rates are not so good at the moment. Whilst they have been creeping up ever so slightly, they still remain woefully low; especially considering it is hard even to keep up with inflation if you keep your money in the bank.
It is hardly surprising, then, that people are tempted to take risks that they otherwise would not consider in order to get hold of the best savings rates available.
Exciting investment offers
There have been some very interesting-sounding offers made by some very famous companies and brands, and others not quite so famous, (John Lewis, Tesco, Mr & Mrs Smith to name a few).
One has recently offered fixed interest rates of 7.5%, for example, on investments of £1,000 and upwards, with a fixed term of four years.
This is especially attractive to low risk investors, as it sounds like a dream come true to have a fixed rate of interest at double or even three times your current savings rate.
Why is the rate so high?
There is a reason why the interest rate is as high as it is. This type of investment is what is known as a ‘Corporate Bond’. These types of bonds are issued by companies when they want to raise capital. Rather than borrowing the money from banks, or financial institutions, they offer the general public the opportunity to lend them the money instead, and in return the public will receive a fixed amount of interest until the loan is repaid.
This can work very well. The company can often raise more money than they would be able to obtain from a bank, and often at a cheaper rate. The public – the ‘investors’ – make a higher return on their money than they would in a savings account.
Corporate bonds: the risks
As always, things are not always quite as attractive as they seem at first glance.
Do not put all your eggs in one basket
- Investing directly in a corporate bond means that you are investing all your funds with just one company. If that company went bust, they may not be able to repay your loan/investment.
- Instead you could access a similar type of investment, but via a ‘Bond Fund’ which significantly reduces the risk, as you are investing in a number of companies, not just one!
- Basic rate tax will be payable on the interest, and this should be done for you by the Bond issuer.
- If you are a higher rate tax payer, you will need to organise this on top.
- You are not covered by the Financial Services Compensation Scheme. This scheme normally protects your investment in the event of default, up to £85,000
However, as long as you understand the risks, this investment could work very well for you as part of your overall portfolio.
You should speak to a professional adviser before embarking on something like this. There is a saying: never invest in something unless you understand it.
Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to contact Henrietta, email us on [email protected] and we’ll put you in touch.