new Tesco Bond

moneylover

Wondered what people think of the new Tesco Bond?
I presume it can go in an ISA and so would be tax free, otherwise there is no point having it as interest rate not high enough.
http://blogs.telegraph.co.uk/finance/ianmcowie/100016887/tesco-offers-income-seekers-new-5pc-bond-along-with-the-bread-and-baked-beans/
The only thing with putting it in an ISA - what do you do with the interest that pops up twice a year? I would only be investing around £5000 as I already have a cash ISA. I put the Provident Financial 7% bond in last years ISA so that will be generating a similar amount. But it wont be enough to re invest in anything so presume I just take the interest out and leave the capital? I use H-L and interest rate on money is minimal plus I think you cant leave cash to build up in an ISA?
Thanks

alanq

I agree not worth considering unless held in a Stocks & Shares ISA in which case 5% is worth 6.25% to a standard rate tax-payer or 8.33% to a higher rate tax-payer. Although Tesco is not having the best of times the risk of it going bust seems small.

Note though that the bonds are being issued by Tesco Bank / Tesco Personal Finance plc. Tesco Bank lost my confidence a couple of years ago when it brought its computer systems in house and there was a complete shambles with many folks unable to access funds for weeks. In my opinion they got off very lightly with the media reporting of the problems. Unless lessons have been learnt I wonder whether the future expanded Tesco Bank will be as secure as Tesco plc.

I note that a number of reports are describing this issue as a "Savings Bond" which I fear will attract the interest of folks who don't read the details of what they are putting money into.

jimjames

Remember that this is a corporate bond not a savings account.

So if you invest £5000 the only time you are guaranteed to get £5000 back is at the redemption date. If you want to sell before then you will have to sell in the market and the capital value may be more or less than £5000 plus you will have the associated selling costs. I would have thought it would be better for small amounts to use a corporate bond fund that has a similar yield so you dont have these issues or indeed the risk of non payment by Tesco bank.

I like the comment in the article

But more adventurous investors may be tempted by Tesco shares. At their current level, they yield 4.7pc net of basic rate tax and are priced at less than nine years’ earnings.

oldvicar

Looks like Tesco are still short of money ??

The interesting question for me is what will Tesco Bank do with the money raised? Lending it to Tesco Supermarket would be a worry.

moneylover

jimjames wrote: »

Remember that this is a corporate bond not a savings account.

So if you invest £5000 the only time you are guaranteed to get £5000 back is at the redemption date. If you want to sell before then you will have to sell in the market and the capital value may be more or less than £5000 plus you will have the associated selling costs. I would have thought it would be better for small amounts to use a corporate bond fund that has a similar yield so you dont have these issues or indeed the risk of non payment by Tesco bank.

Yes, thank you, I understand the way the bond works and would expect to leave it till maturity. A bond fund is worth considering but then I wouldnt get a guaranteed interest of 5% or know what the fund might be worth if I sold it. Are there any solid bond funds I could consider?

The other thing - can anyone comment on my question about what to do with odd bits of interest that will appear in my ISA account if I have a bond fund or individual bonds that pay out their interest on a regular basis. Do people just withdraw this money that isnt enough to re-invest?

VfM4meplse

5% is not a great annual rate for an 8 year investment. Rate-wise, you'd be much better using you full cash ISA allowance.

It's also not covered by the Financial Services Compensation Scheme so I would forget it. If you want to lose all your money you may as well stick it in a horse.

moneylover

VfM4meplse wrote: »

5% is not a great annual rate for an 8 year investment. Rate-wise, you'd be much better using you full cash ISA allowance.

It's also not covered by the Financial Services Compensation Scheme so I would forget it. If you want to lose all your money you may as well stick it in a horse.

I have used my cash allowance. I said that in my original post. I also know about the FSCS.
I wasnt asking for advice about the Tesco bond in this post I am just asking about the interest - just wanted to confirm cant really do anything useful with it except take it out of the ISA ? Again, as I said in my first post, there is no benefit for me in a stocks and shares ISA unless its a bond since with any other investment I have no more tax to pay in or out of an ISA.
I might wait for a different bond, but that is a different matter, the same principle would apply.

grey_gym_sock

yes, if it's uneconomic to reinvest the interest, withdraw it. however, some S&S ISA providers allow you to reinvest interest/dividends for quite low fees, so it could be economic after all, depending on which provider you use. or, if you subscribe to this year's S&S ISA with the same provider as last year, then invest all available cash in the ISA at the same time (i.e. both the new subscription, and the income so far from last year's investment); then do the same thing next year, and so on.

there are 2 risks with corporate bonds: default and inflation. i wouldn't be very worried about tesco bank defaulting, but i would be worried that 5% over 8.5 years will turn out to be a very low real interest rate (i.e. after inflation is deducted). it could even be negative.

EDIT: i should mention that i hold shares in tesco, and no corporate bonds.

moneylover

Thank you Grey GYm Sock
I cant reinvest the interest but its a good point I could leave it there till next ISA input, but can only do bonds for reasons explained. I think you are saying that theTesco bond is not worth it even at 5% taxfree as its for 8 years (unless I sold it and bought another bond). Maybe I should wait for a higher rate bond but of course, the higher the rate, the greater the risk.
Perhaps will pass on this one, its early in tax year anyway. I will see what, if anything, IC say about it too, I expect it will have got a mention in last Fridays IC which I havent seen yet.

grey_gym_sock

i don't reckon it's worth it, but then i don't fancy corporate bonds generally ... the risk/reward ratio doesn't look attractive ... but i could be wrong

moneylover

its difficult to know what to put in an isa other than cash when you are a lower rate tax payer that is worth bothering about
I dont buy the arguament that it makes the tax return easier, putting down a few investments isnt exactly exacting if you are the sort of person who is prepared to put their back into investment. And apart from funds you have to pay usually for the isa wrapper.