Savings: Should you be tempted by ‘mini’ bonds?

Posted on April 20th, 2016 | Categories - Savings

Opposition chats write on the blackboardThere seems to be precious little expectation that interest rates will start to rise anytime soon, so savers can be excused for considering other options to try and improve on the return they receive.

One option is to consider so-called ‘mini’ bonds, which are gaining greater prominence with recent launches from the likes of the rugby club, Harlequins.

But, should you be tempted? What additional risks does the higher rate of interest come with? Are the rates that much better?

Read on as we explain more.

What are ‘mini’ bonds?

The term ‘bond’ can mean a number of different things,. however, in this context it means a bond issued by a private organisation, usually a limited company. If you invest you are effectively making a loan to that organisation for a set period of time. In return for that loan the organisation will pay you interest, and at the end of the term return your capital.

Or at least that’s the plan!

Are ‘mini’ bonds riskier that traditional savings accounts?

Yes.

To begin with the interest, and indeed the repayment of your capital, is not guaranteed. If the issuer of the ‘mini’ bond goes bust, or in some other way doesn’t meet their commitments to investors, you could end up losing some, or all of your money.

Furthermore, ‘mini’ bonds, such as the one issued by Harlequins Rugby Club aren’t covered by the Financial Services Compensation Scheme (FSCS), you therefore have no way of getting your money back if the issuer goes bust.

If it’s riskier, are the returns better?

In theory, yes.

The Harlequin’s ‘mini’ bond pays 5.5% interest per year, given that the interest is set against your Personal Savings Allowance, this may be effectively tax free; up to £1,000 in interest per year for basic rate taxpayers and £500 for higher rate taxpayers.

The best five-year fixed rate bond pays 2.50% gross per annum, less than half the amount paid by the Harlequin’s ‘mini’ bond.

There’s no doubt the interest rate is better than a traditional savings account, however comparing them is dangerous. One, the ‘mini’ bond, is an investment product, where you could lose all your capital, the other is a savings account where your capital is protected, at least up to certain limits.

So, are ‘mini’ bonds worth the risk?

That is something which can only be properly answered after a full financial review, which takes into account your objectives, circumstances and attitude to risk.

However, you should only consider investing if you are prepared to lose some or all of your capital.

There are other factors you should consider too:

  • Is it tradeable? Some bonds are tradeable in a similar way to stocks and shares. Others are not, tying you in until the end of the term. Of course, even if your bond is tradeable and you decide to sell it, you may get less back than you invested
  • How secure is the ‘mini’ bond issuer? Do your research, how likely is it that the issuer of the ‘mini’ bond will make all the interest payments and return your capital at the end of the term
  • Does it sound too good to be true? Many investments are marketed with outlandish claims of large returns, backed by reassuring words such as “guaranteed” and “secured”, if something sounds too good to be true then it probably is. Likewise, if you are tempted by the sound of a secure investment, think again, ‘mini’ bonds are risky and your capital is in no way guaranteed
  • Are the less closely regulated? Yes, the issuers of ‘mini’ bonds are very lightly regulated and do not even have to produce financial accounts, this can make obtaining information about your investment very difficult

We’re here to help

If you are thinking of investing a ‘mini’ bond, we are here to help.

Call Sarah or Bev today on 0115 933 8433 or email info@investmentsense.co.uk

Please note, ‘mini’ bonds are not regulated by the Financial Conduct Authority (FCA)

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