Which bonds could help to boost my savings?

Q. Can you give some idea about gilts and bond funds that could give a fairly safe alternative to a savings account? 

Also how do you purchase an investment bond? It seems that these products are hard to get, other than by paying a financial adviser. I am potentially considering this as an option for investing my pension tax-free lump sum, using it as a safety net for care in later life.

A. It’s understandable that you are looking for ways to boost the return on your cash savings. Interest rates have been falling and yet inflation ticked up in December to 3.4% - making it harder for savers to ensure their cash is keeping pace with rising prices.

Your choice of where to put your money will depend on how much risk you’re comfortable taking with it. Bonds are generally described as “low risk” compared with stocks and shares - but they are a broad asset class, and we should not lump all bonds together.

Owning bonds in a small Indian start-up will be riskier than owning bonds in a well-established, highly profitable US multi-national. Similarly, owning the government bonds of an emerging economy like Mozambique will be riskier than owning gilts (UK government bonds).

You also need to think about when those bonds mature. Bonds that only pay you back many years in the future are generally more sensitive to interest rate changes than those maturing soon.

In practice, most investors will not be buying individual bonds but investing via bond funds. Here, too, they come in different categories depending on your risk level. For example, the JPM Global High Yield Bond Fund will be on the higher end of the risk spectrum, but with the potential for higher rewards than more vanilla bond funds.

• Read: Why it pays to understand the bond market

On the other end of the spectrum are short-term money market funds like the Legal & General Cash Trust. Compared with most bond funds, money market funds carry significantly less interest-rate and credit risk because they invest in very short-term, high-quality securities. As a result, they tend to deliver stable returns with minimal price volatility, at the cost of lower long-term returns.

Both funds are on our Select 50 list of favourite funds.

• Select 50: our favourite funds - selected by experts

If you are in retirement and this cash is your emergency savings fund, then you want to take as little risk with the money as possible. A money market fund would therefore likely be the best option.

It’s important to remember that, while they are very low risk, money market funds are not entirely risk-free.

They can still be affected by defaults, market stress or operational issues.

What’s more, unlike cash deposits, money market funds are not protected by the Financial Services Compensation Scheme against investment losses. However, client assets are held separately from the provider’s own finances, and FSCS protection may apply in some circumstances if assets cannot be recovered due to platform or fund manager failure.

If this money is not your emergency savings fund and you don’t need to access it in the next five years or more, you could afford to take more risk. Many retirees will hold their longer-term savings in a mix of stocks and bonds depending on their risk appetite. This is to ensure that savings they do not need to access imminently have the potential to grow further and keep pace with inflation. Our Select 50 list includes several bond funds which could be included as part of a globally diversified portfolio.

• Read: 60/40 portfolio split explained: the basics

As to your question on investment bonds, I presume you are referring to onshore and offshore life insurance investment bonds. These are normally bought via a financial adviser and cannot generally be bought directly on mainstream DIY platforms.

That’s because they are specialist investments with complex tax rules, often used by higher-rate taxpayers to defer tax until retirement. They have downsides and, for some people, it would be better to save into an ISA or pension if available.

If investment bonds are something you are considering, it would be well worth getting professional financial advice.

• Learn more about our award-winning Stocks and Shares ISA
• Learn more about our award-winning Self-Invested Personal Pension

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• Read: ISA, pension or pay down mortgage - which is best?
• Read: Retirement plan checklist: 10 years from retirement
• Read: 5 smart moves to make before 5 April

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised Fidelity’s advisers or an authorised financial adviser of your choice.