A novel fixed rate bond – but you can get better returns elsewhere

The most interesting development in the savings market is the launch of a fixed rate corporate bond from Lloyds TSB paying 5.375% gross and aimed specifically at retail investors.  Interest is paid half yearly which is attractive to those who need income and the bond has a minimum investment of £1,000.

The big difference between the Lloyds TSB offer and other fixed rate bonds available to small investors is that it can be bought and sold on the stock market which means that if yields on comparable bonds go down, there is a chance, admittedly fairly small, of a capital gain.  Otherwise you can hold the bond to maturity in September 2015 and your investment will be repaid in full. The bond will not be available in Lloyds TSB, Halifax or Bank of Scotland branches but it will be available through banks’ stock broking arms and from other private client stockbrokers.

It can be held as a direct investment, in a SIPP or ISA, providing the bond has a maturity of more than five years at the time of purchase.  The bond matures on 7th September 2015 so if you want to buy for your SIPP or ISA you will need to buy before September of this year.  Remember too that because the bond is bought and sold on the stock market, it may not be available at the issue price of £100 for every £100 of stock once trading starts.

If the issue goes well, it seems likely that other banks may follow suit with similar tradable retail bond offers.  It is worth pointing out here that if you are prepared to invest in tradable securities, where the value can go up and down, you can currently get a better return from Permanent Interest Bearing Shares PIBs.  For example, Co-operative Bank PIBs are trading at around £85 for each £100 of stock with a gross yield of 6.57% and a yield to redemption – but only if the bank calls in the issue in 2015 - of 9.92%.  If the bank doesn’t redeem the PIB there is no guarantee of getting your money back although you can sell in the market at any time and hopefully at a profit.

Fixed rate deposits

For those who prefer the simplicity of fixed rate deposit accounts, the best return remains with ICICI bank which is paying 5% fixed for five years on its HiSAVE accounts for savings of £1,000 or more.  This account is only available online – visit www.hisave.co.uk.  ICICI Bank is covered by the UK Financial Services Compensation Scheme which guarantees deposits up to £50,000. 

But five years is a long time to commit your savings in these uncertain markets.  Probably best value are the one-year fixed rate bonds paying around 3% gross.  One thing is certain, Bank Base Rate is more likely to go up than down and a one-year bond gives you flexibility to take advantage of better rates when they come along.

You can get 3.25% from United National Bank on sums of £2,500 or more or 3.02% for a six month bond.  Accounts can be opened by post or at branches – visit www.unbankltd.com for details.  Savers are covered by the UK’s compensation scheme. 

For those with smaller sums to invest, Kent Reliance Building Society (www.krbs.com) is paying 3% on savings of £100 or more but you can only open an account by post or at a branch.   Northern Rock, (www.northernrock.co.uk) Barnsley Building Society (www.barnsley-bs.co.uk) and the Post Office (www.postoffice.co.uk) are also paying 3% on sums of £1, £100 and £500 respectively and they both offer an online facility.  ICICI Bank is paying 3% too on sums of £1,000 or more.

For those prepared to commit their money for terms between one and five years, ICICI Bank also pays top rate for four-year fixed rate bonds at 4.5% for four years and but has dropped the three year rate from 4.25% to 4.15%  - although it is still the best buy for three year investments. 

At two years Santander has withdrawn the very attractive offer at 4% for sums of £10,000 or more and has reduced the rate to 3.5%.  Kent Reliance is now the top payer at 3.75% for investments of £100, with the Post Office and ICICI Bank both paying 3.7% for two years on sums of £500 and £1,000 respectively.  

Sainsbury’s Finance has come into the market with a two year bond paying 3.55% fixed on deposits of £5,000 to £50,000 and you can open an account online or by telephone.