Tesco Bank offers bonds returning 5%

Savers looking for a decent interest rate on their nest-eggs are finding they have to look beyond the traditional banks and building societies. Many may be attracted by the news that Tesco Bank offers bonds returning 5%interest.

The bonds are aimed at private investors who are prepared to invest their cash until 2020. Any bond holdings that are cashed in before that time will return a fluctuating rate of interest.

The minimum investment is £2000, and the money can be sheltered within an ISA setup so that the 5% interest return does not attract any tax deductions.

There are a few drawbacks to the offer, and potential investors should take these into consideration before plunging in.

Firstly, the 5% interest rate is very attractive at present, but will not be competitive if interest rates start to rise. The economy is presently moribund, and nobody is expecting brisk growth in 2012, but rates might start to rise by 2014.

The bank has made it clear that these bonds are not covered by the financial services compensation scheme, which will refund £85,000 in the event that a bank collapses. The likelihood of one of the world's most successful retailers defaulting seems remote, but it is worth considering.

Ethical investors might also be concerned that the bonds could be a way for Tesco to raise capital to finance the further expansion of their retail empire. Those who are concerned about preserving their local High Street may prefer to put their cash elsewhere.

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