Could new national Grid inflation-linked bond be a lifeline for savers?

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power Savers struggling to find decent returns in the current low interest-rate environment are being wooed by a new provider - the National Grid.

It is offering the UK's first inflation-linked company bond open to anyone with at least £2,000 to invest.

Inflation-linked bonds of this kind are normally only available to major institutional investors. But the new 10-year bond from National Grid is targeting retail investors in a bid to raise between £50m and £140m.

How does it work?
The bond, which requires a minimum £2,000 investment, will have an annual interest rate of 1.25%, plus the rate of inflation as measured by the Retail Price Index (RPI) - currently 5.2%.

It will offer two cash interest payments each year and the final repayment at maturity will reflect the compound effects of inflation.

However, if RPI has fallen by maturity, the company will pay back no less than the face value of the bonds, which are expected to be available until September 29 and issued on October 6.

What are the risks?
Unlike the savings accounts on offer from UK banks and building societies, retail bonds are not covered by the Financial Services Compensation Scheme (FSCS). Should the company offering the bond go out of business, you could therefore end up losing your investment.

However, they do offer a way to beat the poor returns currently available from standard savings accounts and have become more popular with savers as a result.

What other bonds of this kind are available?
This is the first inflation-linked bond to be offered by a company to UK consumers.

However, Royal Bank of Scotland last year launched a retail bond with an interest rate of 3.9% or RPI - whichever is higher - while Tesco and John Lewis have also previously targeted retail investors with bonds.

The London Stock Exchange's retail bond trading platform lists bonds from companies such as BT, GlaxoSmithKline, Morgan Stanley, GE Capital and Enterprise Inns.

Why is National Grid offering this bond?
National Grid is tapping the bond market to help fund its capital spending programme, which will require new power connections and upgrades to its existing infrastructure.

Malcolm Cooper at National Grid said: "National Grid is a relatively low-risk business due to the demand for what we do and our highly regulated nature.

"There is evidence of strong demand from retail investors for inflation-linked products, and we hope that this product will address some of that demand."

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