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Can booming John Lewis rescue hard-hit savers?

Can booming John Lewis rescue hard-hit savers?

11/03/2011 11:29

If John Lewis, one of Britain's top retailers which reported profits surging to £368 million this week, answers all our prayers for home furnishings and smart colour televisions, has it found the holy grail for harshly treated savers too?

The question arises with the launch of the John Lewis Partnership Bond, a clever scheme to raise £50 million as a cheap source of finance for the company until 2016, and also to cash in on its glowing reputation.

In the first three days, around £8 million has gushed in from some of the 1.5 million people entitled to buy the Bond: the firm's 76,000 employees (partners), and anyone holding a John Lewis Account Card or John Lewis Partnership Credit Card on February 12.

There is so much concern among savers, whose last hope of keeping up with inflation sank when National Savings & Investments (NS&I) scrapped index-linked certificates last year, that the scheme could hit its £50 million target ahead of the April 11 deadline for applications.

Although John Lewis Partnership raised £275 million and £300 million on the bond markets in 2009 and 2010, the retail giant, which includes Waitrose, certainly looks a safe place to park spare cash.

"We wanted to diversify our investor base," says John Lewis Partnership head of treasury Ian Fleming.

"A retail bond seems a good way of doing it. We want to see if it works for customers, so we have done it in quite a small size.

"We see gift vouchers as an effective way of giving customers full value, and it is possible we will do more bonds like this in future."

After the recent success of Tesco's Bank Bond, promising small savers a return of 5.2% on the launch price until maturity in 2018, it is possible that savers have more confidence in acclaimed high street giants than in battered and busted banks steered by bonus-grabbing bosses.

Investors need a minimum £1,000 for a John Lewis Bond, which promises a 6.5% return (before tax) each year until maturity: that's 4.5% in cash and 2% in gift vouchers.

A £5,000 investment will produce £225 in cash and £100 in vouchers each year. On the maximum £10,000, the annual return will be £450 (cash) plus £200 (vouchers), a total £650, with basic rate tax (£130) leaving £520 for the investor.

With so many savings accounts paying derisory interest - some as little as 0.1% - the John Lewis Bond payout looks generous.

However, a John Lewis Bond cannot go into a tax-free ISA wrapper, because it cannot be traded. Nor is it covered by the Financial Services Compensation Scheme (FSCS).

Investors are locked in, unable to touch their money, until 2016, so the money must not be needed for a long time.

Patrick Connolly, at financial advisor AWD Chase de Vere, has some concerns.

"This innovative approach to raising money is likely to be popular with their 'partners' and customers," he says.

"It's a profitable company and a trusted brand and the return might look competitive, particularly with interest rates at historic lows.

"However, investing in a single company is a high risk approach, especially if the investment represents a reasonable proportion of your overall savings.

"Even strong and secure companies, like high street banks, have hit major financial difficulties. Look at BP."

Connolly thinks the use of John Lewis gift vouchers won't suit all investors and it will generate a tax liability which is deducted from the cash payment.

After tax, the John Lewis Bond will pay 5.2% per annum to basic rate taxpayers, and 3.9% for higher rate taxpayers.

Investors who do their homework, however, can match this return elsewhere without locking money away until 2016.

Connolly adds: "A better approach for savers keen on corporate bonds may be a diversified fund, such as the M&G Corporate Bond or Invesco Perpetual Corporate Bond funds.

"Those who want more capital protection can find fixed rate savings accounts paying more than 4% per annum over four or five years, fully protected by the FSCS. Even better, fixed rate cash ISAs can be secured on similar terms, so interest earned is tax-free."

At Dennehy Weller, a financial advisor specialising in bonds, Brian Dennehy is equally cautious about putting a lump sum into one firm - however successful it might be.

"If you are comfortable with one firm, fine," he says.

"But there are risks in going with one provider. Imagine the possible ramifications if Tesco, expanding fast in China, hit a problem in its distribution systems."

Bonds issued by private companies usually do better when inflation and interest rates are falling.

Dennehy adds: "Bonds are an on and off bet. Either you get your money back on maturity, or you don't. That is why a manager can have 300 different issues in a bond fund, whereas successful equity funds hold 30 to 80 shares."

However, the latest Bond Watch from Dennehy Weller still makes a strong case for backing bond funds, despite uncertain economic prospects. Returns on many bonds rose in 2010, possibly to reflect higher levels of perceived risk.

Few corporate bonds went bust, either. Now, says Dennehy, savers are pouring cash into funds holding high yield, riskier bonds in search of income.

Higher-paying funds (6%-plus per annum) include Schroder Monthly High Income, Baillie Gifford High Yield Bond and Gartmore High Yield Corporate Bond. Held in ISAs, all those can avoid tax.

It might get better in 2011. Nick Gartside at JPM Strategic Bond says total returns of 17% are possible, from a mix of yield and capital gain.

Nobody really knows what will happen to bonds when governments stop printing money to produce quantitative easing.

But things will have to get very grim indeed before the proud holders of John Lewis Partnership Bonds lose any sleep.

:: Information: John Lewis Partnership Bond (0845 608 1490 and www.partnershipbond.co.uk); Dennehy Weller (020 8467 1666 and enquiries@dwcifa.com); AWD Chase de Vere (0845 140 4014 and www.awdchasedevere.co.uk).

Poundnotes

:: The decision by the European Court of Justice that companies cannot charge different rates to men and women because of their gender has far-reaching implications for defined contribution pensions, argues Deborah Cooper at investment specialist Mercer's.

"Men are currently offered bigger annuities than women, for the same sized fund, because they are assumed to live shorter lives," says Cooper.

"As a result, male defined contribution pension holders are likely to see annuity costs rise while the cost for women might fall.

"However, women on average live longer than men. It is correct to say that some of this difference might be due to social or lifestyle factors, but insisting that it is ignored entirely may give rise to unintended consequences.

"For example, insurance companies could require stricter underwriting tests, making insurance more expensive for everyone."

:: As the Monetary Policy Committee (MPC) leaves the Bank base rate unchanged at its record low of 0.5%, Ray Boulger of mortgage broker John Charcol fears prospects of a double recession are increased by the upward spike in oil prices.

"In the short term, rises in the oil price, coupled with much greater than usual short-term uncertainty about the pricing impact of events in the major oil-producing regions, increases the challenge facing the MPC," he says.

"One must now expect inflation to peak even higher than looked likely only a month ago.

"However, the impact on consumer spending of higher pump prices is similar to the impact of higher rates, so for the MPC to impose an avoidable double whammy by increasing the Bank rate would make no sense."

Boulger doesn't think the MPC will increase the Bank rate as quickly as the market expected, which might explain why five-year swap rates have eased back. While the cost of a five-year fixed rate mortgage has increased by nearly a full percentage point in the last three months, from a low of 3.69%, variable rates have stayed broadly unchanged.

"As a result the premium of around 2% paid for the security of a five-year fix looks too high, except for those who need, or prefer, the security of a fixed rate," he says.

"The 2% differential between the best five-year fixes and the best variable rates at the same loan-to-value means that the Bank rate will have to average more than 2.5% over the next five years for the fixed rate to prove cheaper," he says.

Instead of getting a fix, says Boulger, borrowers on variable rate loans should overpay each month, so their monthly payments compare to what they might have paid on a five-year fix at, say, 4.5%-5%.

Most lenders allow overpayments of more than this amount without an early repayment charge being triggered.

In many cases, this approach will soften the blow when rates eventually do rise, and there will be no need to increase monthly payments until after several Bank rate increases.

Enquiries: John Charcol 0800 718 191 or visit www.charcol.co.uk

:: Santander claims its Loyalty Flexible ISA Issue 1 will pay at least 2.80% above the Bank base rate for the first 12 months, and the rate will not go below 3.30% for this period.

The account allows penalty-free access to the money but the Loyalty Flexible ISA Issue 1 is only for customers who have their main current account, mortgage or investment with Santander, or who switch their main current account to Santander using the Account Transfer Service.

:: Consumers can slash phone bills with the latest Homephonechoices.co.uk exclusive offer in conjunction with low-cost home phone and broadband provider Primus Saver, says Michael Phillips, product director at the website.

The Primus Line Rental Saver phone package costs £6.79p per month and offers evening and weekend calls at 1p a minute, while daytime calls cost 6p per minute.

The website says three key rules invariably keep bills down: pay by direct debit; choose paperless billing; and check the small print.

:: High five savers

Phone No Rate Account Period Deposit Interest paid

Close Savings www.closesavings.co.uk 5.00% (F) Premium Gold Three Year Bond (B) £10,000 Yly

AA 0845 603 6302 5.00% (F) Fixed Rate Account Five Year Bond £1 Yly

Santander 0800 234 6065 3.30% Flexible ISA Issue 3 Instant £1 Yly

Close Savings 0207 392 1772 3.15% Premium Gold 180 Day 180 Day (B) £10,000 Qly

Cheshire BS 0800 243278 2.95% 30 Day Postal Saver 30 Day (P) £1,000 Yly

:: Top five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494999 2.29% (rem) variable for term 60% £99 Yes

Vernon BS 0161 429 6262 2.49% disc for two years 75% £495 Yes

ING Direct 0845 032 8800 2.50% disc until 31/03/13 70% none Yes

First Direct 0845 610 0100 2.79% variable for term 65% £199 Yes

Furness BS 0800 220568 3.29% (disc) for three years 80% none Yes

Code:

*K- Operated by Internet, Telephone, or Post

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).

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