New fixed rate bond pays savers 6.25% a year – turns £10k into £14,387

Martin Lewis advises on moving your savings into ISAs

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Many savers will leap at the chance of getting a market-leading return on their money, which can be bought inside a tax-free Isa or self-invested personal pension (Sipp). Yet they should tread carefully.

While the new fixed-rate bond is open to ordinary savers, it is not a standard savings account and involves added risk.

Which is absolutely fine if you understand what you are buying, but a problem if you don’t.

A company called RCB Bonds plc has announced the launch of a new “sustainable bond”, which runs all the way to 2029.

Its highly attractive annual return of 6.25 percent would turn an initial £10,000 investment into £14,387.11.

Tempted? Here’s how it works.

The bond is issued on behalf of a charity called The Royal Masonic Benevolent Institution Care Company, or the RMBI Care Co.

It dates all the way back to 1842, when it was established with philanthropic funds from the Freemasons. 

Today it provides residential care, nursing care and dementia support to older people, across 16 locations in England & Wales.

Its pedigree is solid but the product is similar to a savings product called mini-bonds, that has run into problems in the past.

Crucially, your money is at risk, and in contrast to standard savings accounts, any losses will not be covered by the Financial Services Compensation Scheme (FSCS).

RCB was established to help charities and ethical companies raise loan finance in the bond markets. To date, it has issued £377million of bonds for seven charities.

With the number of over 85s forecast to double to 3.3 million over the next 25 years, there is growing demand for high quality residential care homes and services.

The RMBI Care Co plans to use the money to upgrade its oldest and least profitable care homes.

The bonds are listed on the London Stock Exchange and can be bought through reputable platforms including AJ Bell and Hargreaves Lansdown.

The minimum initial subscription is £500 and savers can buy more in multiples of £100 thereafter.

That fixed 6.25 percent interest rate is paid twice a year: on March 7 and September 7, until the final payment on March 7, 2029.

The risk is that RMBI runs into money troubles and defaults on its payments during that time. Your capital is at risk.

It may be a low risk, but it’s there. And things have gone wrong with mini-bonds before. 

In 2019, mini-bond provider London Capital & Finance (LCF) went bust owing around 12,000 people £236million. 

LCF tempted savers with rates of up to 8.95 per cent, tax-free inside the Innovative Finance Isa scheme.

Mini-bond providers Blackmore Bond and Asset Life collapsed soon after, followed by another mini-bond provider, West Ham United sponsor Basset & Gold.

That pretty much finished the mini-bond boom and the Innovative Finance Isa, a structure designed to encourage these bonds.

The RMBI Care Co looks a more solid operation and its bonds may work for experienced savers who want to generate a higher income as part of a balanced portfolio of savings and investments.

I asked Andrew Hagger, savings expert at MoneyComms, for his view and he made a good point.

He pointed out that savers can currently get 4.45 percent fixed for five years from Close Brothers Savings and Gatehouse Bank, risk-free up to the £85,000 FSCS limit. “You have to question whether it’s work taking greater risk with your capital for an extra 1.8 percent a year return.”

Hagger added: “There have been numerous bond failures in recent years, so savers shouldn’t jump in based purely on the attractive headline rate without consulting a professional independent financial adviser so they can understand any potential pitfalls and risks.”

That’s looks like sound advice to me.

As always, savers should only buy what they understand and remember the old adage: “Never put all your eggs in one basket.”

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