In these hard times for savers, any promise of eight per cent annual income tax-free sounds too good to be true.

It could yield four or five times the money earned after tax on a building society account.

But this is the figure used to promote corporate bonds just before the end of the individual savings account (ISA) allowance for tax year 2002/3 tomorrow.

The interest offered leaves banks and building societies far behind while the risk appears to be much lower than shares.

Corporate bonds are issued by companies to raise money more cheaply than by borrowing from the bank.

They are traded on the market, pay interest and return the original capital paid for them on maturity.

All this depends to some extent on the financial health of the company concerned so bonds are graded on reliability from "investment" (sound) to "non-investment" or "junk" (much more risky).

Riskier bonds pay higher interest rates.

For income seekers, corporate bonds are becoming the ballast to anchor personal portfolios in turbulent times.

The standard advice is to hold your age in bonds - a 45-year-old should hold 45 per cent of a portfolio in bonds.

On retirement most of an individually held savings pot outside the pension should be in bonds to avoid the sort of stock market rout seen in the last three years.

The fund management arm of Legal & General has been urging investors to "play safe" by buying corporate bonds as an alternative to wasting their ISA allowance altogether.

Within an ISA, corporate bond funds pay interest free of tax.

If funds hold more than 100 different bonds, the impact should be limited when big name companies, like Cable and Wireless and Marconi, suddenly hit trouble.

The concept of the bond fund worries David Cassidy, of Nelson Money Managers. He said: "People are switching to bonds for fixed income for a fixed period with fixed return of capital on maturity.

"But bond funds are really unit trusts, buying and selling bonds at various prices with no single maturity date. Investors therefore don't get a specific date for the return of their capital because maturity rates differ."

Brian Dennehy, of financial advisers Dennehy Weller, said: "There are risks to corporate bonds at this stage in the financial cycle.

Interest rates might start to rise, causing bond values to fall as holders get back into cash.

"Few advisers explain how devastating a period of deflation could be. Despite the low-risk aura, many bonds would not provide a hiding place as those which survive would be sharply downgraded and capital prices will fall steeply."

Dennehy believes the safer investment could be equity income funds - holding shares in companies paying reliable dividends and also suitable for an ISA wrapper.

Friday April 4 2003