Should you buy a John Lewis bond?

Big household names are after your cash more specifically, they'd like to borrow money from you. The latest is department store giant John Lewis. Often viewed as a bellwether for the British economy, it is launching a corporate bond aimed at the retail market, with the goal of raising £50m. But should you invest?

Throughout the five-year life of the bonds (which are being sold on a first-come, first-served basis to John Lewis staff and customers who hold a partnership credit card or John Lewis account card), the interest rate will be 4.5%. That's based on what's called the bond's nominal value. So if you sign up for, say, £1,000 worth (the minimum investment), you'll receive annual interest before tax of £45. On top of that, John Lewis is offering an extra 2%, but this comes as vouchers that can be redeemed in its stores or at Waitrose. So, again on an initial investment of, say, £1,000, that's another £20. At the end of five years, the bond will be "redeemed at par".

In other words, you'll get your money back, provided John Lewis does not go bust in the meantime. There's quite a bit to like here. A 6.5% interest rate is attractive. As long as you are a keen John Lewis or Waitrose shopper, and so don't mind getting your 2% in vouchers, that's a better gross rate than you'll get in a savings account. It's also better than Tesco's recent retail corporate bond, which offered 5.2% a year over seven years. While this type of bond is not covered by the Financial Services Compensation Scheme, a blue-chip retailer like John Lewis seems a pretty safe home for your cash.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So why are we wary? The extra 2% is gimmicky it will draw headlines, but it's also liable for tax, like the rest of the interest paid. Unlike the Tesco offering, you can't avoid tax by putting the John Lewis bond into an Individual Savings Account (Isa). That knocks the rate down to 5.2% for a basic-rate taxpayer and 3.9% at the higher rate. Not bad, but no longer as attractive when you consider that a cash Isa can give you up to 5% (from Skipton Building Society) if you lock your money up for five years.

There's a bigger problem with inflation high, the Bank of England interest rate is likely to start rising this year. As Simon Lambert notes on Thisismoney.com, "for now the 6.5% return looks mighty but... in two years' time it might not look so fantastic". So the ability to switch from one investment into another is valuable right now, and reduces the appeal of a fixed-term bond particularly when, as Jill Papworth in The Guardian points out, unlike the Tesco bond, you can't trade the John Lewis bond on the stock exchange.