Deposit rates might be creeping up, but it's still tough to find a decent return. But for savers seeking income, this new four-year bond paying 7.5% looks very promising, says Merryn Somerset Webb.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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.
MoneyWeek videos
Watch this before you buy a retail bond
Seven things you should know before you buy retail bonds.
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.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
Best and worst countries to retire to from a tax planning perspective
Gold versus cash: which is the better store of value?
