Being a saver remains a miserable business in Britain. Inflation may be a tad lower than it was, and deposit rates may be creeping up, but it’s still nigh on impossible for a higher-rate taxpayer to make a real return on his money if he keeps it in cash. Enter retail bonds.
Last year, some of the best-known and most trusted names in the market (John Lewis and Tesco) and some not-so-well-known names entered the bond market to sell debt directly to the public at pretty decent-sounding rates.
One bond we wrote about here was a four-year non-transferable one from currency exchange firm Caxton FX. It came with risks – getting your money back depended on Caxton staying solvent – but it offered an annual interest rate of 7.25%, which, at a time (last September) when a 40% taxpayer needed to get 7.5% to break even, was about as good as it got.
But now something at least as good has turned up. Boutique hotel guide and booking service Mr & Mrs Smith is launching a retail bond (the Smith Bond), in order to raise £5m to “develop a family of sister brands”. The Smith Bond has a minimum subscription of £1,000, but no upper limit. It will run for four years and pay a fixed-rate return of 7.5% paid out every six months. That will make it sound like something of a dream ticket for those searching for income.
But that’s not all. If you’re a regular user of Mr & Mrs Smith’s services, or intend to be, you can opt to receive your interest in ‘loyalty money’ redeemable against boutique hotels and houses around the world. Do this and your return jumps to 9.5%, a level that will make almost everyone a real return.
Watch this before you buy a retail bond
Seven things you should know before you buy retail bonds.
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This sounds great, but before you rush to buy, note that this isn’t risk-free. First, the bonds are unsecured and come with single company risk: you’ll only get your money back if the firm still exists in four years’ time. Will it? My guess is that it will. It’s a well-respected brand (I usually check to see if it lists the hotels I’m headed for before I book). But it isn’t a given –firms are most at risk when they borrow to expand into competitive markets. Note that while the British division made a profit last year, the group as a whole makes a loss.
Second, you’ll be locked in for four years. So if liquidity is important to you, the extra interest on the bonds over a deposit account (or corporate bond fund) may not be enough to make it worthwhile. Finally, the 9.5% may not end up being 9.5%. Using holiday vouchers assumes you have both spare time and spare money. If you’re still interested, visit Mrandmrssmith.com/smithbonds.