Beware the 6% ‘shaving’ bond
When interest rates on savings accounts are as paltry as they currently have been, it’s little wonder that savers are hunting out the most competitive deals they can. Rate is king, after all.
But a new account that promises an AER of 6% is not all that it first seems. The concept is relatively unique; King of Shaves, the UK’s second largest affordable brand of shaving software, has launched an account in a bid to build a war chest and take on the big boys of the shaving sector.
To do this, it is offering a three-year non-transferable ‘shaving’ bond paying 6% - 12 times the current Bank of England base rate - with each individual allowed to apply for up to £5,000 worth of ‘shaving’ bonds in multiples of £1,000.
It claims it can make this offer by “cutting out the middle man and passing savings back to investors by avoiding the exorbitant fees charged by bankers, lawyers and stockbrokers”.
The rate certainly looks good – and, as an added "incentive", you’ll receive a limited edition mirror finish shaving bond certificate and free King of Shaves products for the duration.
But be warned – this is not a savings account. And, as Kevin Mountford, head of banking at moneysupermarket.com, rightly points out, this account is more of a gamble than a savings opportunity.
The ‘shaving’ bond is actually a corporate bond issued for a non-listed company. And the money invested will be used as part of King of Shaves marketing strategy. Investing in an unlisted company is a risky business – as it does not have to declare information to the stockmarket, you might find it hard to know exactly how healthy it is and how well equipped it is to survive the economic downturn.
But the main reason you shouldn’t invest in this bond is because it is not covered by the Financial Services Compensation Scheme. This means that, should King of Shaves flop down the line - as we’ve seen happen to several banks – the industry-funded scheme will not step in to refund your losses, and the government is unlikely to either.
While fixed-rate savings accounts tend to have withdrawal restrictions, you are allowed to take back your money at any time - although, of course, you will be subject to loss of interest as a result.
However, King of Shaves’ small print clearly states that there is no way of getting your £5,000 investment out within the three-year term. And there is no guarantee in place to make sure the company can repay the bond at the end of the term either.
King of Shave recommends people “apply early” for the bond, as it expects the account to be “heavily oversubscribed”.
I would, however, recommend caution. While 6% is a good rate, this deal is not the same as a traditional savings account. Better to earn a little less interest and be confident that your money is protected than chase a rate that is more of a gamble than a savings opportunity.