New bond pays 6.25pc as savings war heats up

Bonds. Rising returns.
Bonds. Rising returns.

Investors can earn an annual interest rate of 6pc if they lend money to a company providing care for the elderly for six years, far ahead of the typical savings account.

The fixed-rate “retail bond”, which will trade on the London Stock Exchange, comes from the Royal Masonic Benevolent Institution Care Company, which provides care and dementia support in homes across England and Wales.

The bond will offer investors annual interest of 6.25pc, compared with an average rate of 1.82pc in an easy access Isa, according to Moneyfacts, an analyst. However, experts have urged investors to proceed with caution as the battle for savers’ cash intensifies.

Rates are rising across the savings market. NS&I's bonds are now paying 4pc and come with a guarantee from the Treasury so other borrowers are having to fight harder for investors' cash.

A higher yield typically comes with greater risk. While retail bonds are considered safer than “mini bonds”, which cannot be traded, they still do not provide any guarantee. They are also not covered by the Financial Services Compensation Scheme, which means that if the issuer goes bust, bondholders are likely to lose their money.

Mateusz Malek, of the wealth manager Killik & Co, said: “You can get some good quality bonds, but there are many that do not have official credit ratings and are not ‘investment grade’.

“This means savers have to do their own research on the companies, which can be difficult.”

Holders of a bond issued by the rugby club Wasps are still waiting for their money back after it reached its scheduled maturity date in spring last year. Meanwhile, bondholders in Eros Media World, a Bollywood production company, are waiting for thousands of pounds in late payments.

Unlike mini bonds, retail bonds trade on the stock market so investors can claim back some money before it matures. Mr Malek said retail bonds issued by smaller companies were typically less liquid, which meant that any savers looking to sell before maturity could run into delays.

Interest on the new charity bond will be paid twice yearly on with the first payment due on September 7 this year. DIY savers will be able to invest via AJ Bell, Hargreaves Lansdown and PrimaryBid. The minimum purchase is £500.

The care company, which intends to raise £10m via the bond, said that it will use the funds to invest in new care homes.