For some time now, it has been difficult to talk about savings without mentioning the longstanding low interest rates that continue to plague the market. This is one of the key challenges facing savers right now, and many are turning to alternative investments in order to earn worthwhile levels of interest.
Bonds are a fairly popular way to pursue better interest rates than savings accounts can offer. But are they really a good choice? This depends on a number of factors, not least the type of bond you choose.
What are Bonds
In one sense, bonds can be similar to fixed-term savings accounts. You purchase one or more bonds, and hold them for a given amount of time. During that term you will receive interest at a fixed rate, usually paid yearly, and if all goes well you will then receive the bond’s purchase price back at the end of the term. In practice, many investors sell the bonds on before they reach maturity rather than holding it for the full term.
Types of Bond
There are several types of bond in which you can invest:
Government gilts are popular because of their reputation for being a relatively low-risk investment. They are bonds issued (and therefore essentially backed) by the government. While there is some risk if the government encounters financial difficulties, a relatively stable government such as the UK’s is generally a safe place to put money. The British government has never yet reneged on a debt. The main disadvantage is that government bonds do not carry interest rates too far above the best savings accounts. However, they can offer those interest rates over shorter terms and offer greater flexibility for certain investment goals.
Corporate bonds are similar to government ones in many ways. However, they are issued by businesses and this leads to several key differences. They tend to be higher-risk, as companies are more vulnerable to financial difficulty than governments and you will be relying on a single firm to pay you back. Investment credit ratings can help you assess the exact level of risk. If that firm encounters serious problems, it may be unable to repay. However, the trade-off is that returns tend to be much more attractive than on government gilts.
Retail bonds are bonds issued by private companies specifically for the retail market. They are generally traded through the London Stock Exchange’s Order Book for Retail Bonds (Orb). Compared to other corporate bonds, they can be bought and sold more easily providing greater liquidity. Many qualify for tax-free investment in a stocks and shares ISA or SIPP. Unlisted bonds from smaller companies are also available, but these are higher-risk and are generally recommended only for experienced investors. Everyday savers looking for a boost should look at safer options.
