With the 5th April end of tax year deadline close at hand, we bring you our selection of income and growth investment plans to help you decide how to best make use of this valuable tax break.
These plans offer you a defined return for a defined level of risk, which means that you know the exact terms of the plan prior to investing and therefore exactly what needs to happen in order to provide you with the stated income or growth return.
Conditional capital protection
Unlike investment funds – where all of your capital moves in line with daily fluctuations in the market – these plans contain what is known as conditional capital protection. This means that you will receive a return of your capital at the end of the plan term unless the underlying investment, normally the FTSE 100 Index or a number of FTSE 100 shares, has fallen by more than 50% or finishes below a level specified at the outset, e.g. 3,900 points, in which case your capital would be at risk.
The Enhanced Income Plan from Investec was our most popular income investment in 2013 and continues to be a best seller. The main appeal of the plan is that it offers a fixed income which is paid to you each month, regardless of the performance of the FTSE 100 Index. The annual income is currently 6% (paid as 0.5% each month) which is high when compared to typical yields currently being paid by equity income funds. There are also no additional annual management charges so you know exactly how much you will receive, when and for how long. Capital is at risk if the FTSE drops by more than 50% during the plan and fails to recover by the end of the term, in which case your initial capital will be reduced by 1% for each 1% fall, so you could some or all of your initial investment.
Fair Investment view: “6% tax free income (if held in an ISA) is the equivalent of 7.5% taxable income for a basic rate tax payer and 10% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with ongoing uncertainty around future interest rates and dividend yields, this plan could offer a competitive balance of risk versus reward that could be considered by both savers and investors”
For those looking for a potentially higher income, the FTSE Quarterly Income Plan from Start Point (BNP Paribas) will pay 7% each year provided the FTSE 100 is between an upper and lower range at the end of each quarterly measurement date. This range is based on its level at the start of the plan and starts at +/- 10%, increasing to +/- 30% by the end of the plan. If the FTSE is outside of the range on any quarterly date, no income is paid for that quarter. Capital is returned at the end of the term unless the FTSE has fallen by more than 40% of its starting value on the final day of your investment. If it has, your capital will be reduced by 1% for each 1% fall, in which case you could lose some or all of your initial investment.
Fair Investment view: “Income needs remain for many a top priority and with low savings rates and many UK equity income funds yielding less than 4%, it is perhaps easy to understand why. For those looking to combine a high yield opportunity with some protection against a falling stock market, this plan is worth a closer look”
Our experienced investor section contains a number of investment opportunities for our existing investors and those who have experience of putting their capital at risk. The Enhanced Income Builder from Gilliat offers up to 7.2% each year with income accruing for each Friday during the term that the FTSE 100 closes above 3,900 points – if it closes below this level, no income will be added for that week. All accrued income is then paid out each quarter. Your capital is at risk if the value of the FTSE on the last day of the investment is below the same 3,900 point barrier, in which case your initial capital will be reduced by the equivalent drop in the Index, so you could lose some or all of your initial investment.
Fair Investment view: “If you are looking for the potential for a high level of income and you are confident the FTSE 100 will remain above 3,900 points in the coming years, this plan is a worthy contender. Due to the gap between the recent levels of the FTSE and the floor of 3,900 points, this plan combines the potential for a high yield with some capital protection against a falling market”.
Please note that past performance of the FTSE 100 is not a guide to future returns.
Kick out investments combine the potential for a defined return with the opportunity to mature early, even if the market has only gone up by a small amount or with defensive plans, even if has gone down slightly.
The highest headline return for an investment based on the FTSE 100 Index is currently on offer from Investec’s Enhanced Kick Out Plan. This investment can mature early, or ‘kick out’, provided the value of the FTSE 100 Index at the end of each year is higher (subject to averaging) than its value at the start of the plan – if it is, you will receive 9.5% for each year invested (not compounded). Your initial capital is at risk if the FTSE falls by more than 50% during the investment term and also finishes below its starting value, in which case it will be reduced by 1% for each 1% fall, so you could lose some or all of your investment.
Fair Investment view: “The potential for 9.5% annual returns as early as year 1, even if the FTSE only rises by a single point, perhaps helps to explain why this was our best selling kick out plan in 2013. The combination of high growth potential and the ability to mature early could make for a compelling opportunity in the current market.”
For those who are concerned about investing in the stock market when the FTSE is high, the FTSE Defensive Supertracker from Morgan Stanley is our first defensive investment selection. The plan offers a return linked to any rise in the FTSE 100 Index over the six year term, which is then multiplied by 2.4. The main feature of this investment is that the growth is based on any rise above 90% of the FTSE’s starting value – so, for example, if the FTSE fell 5% you would still receive a 12% return (5% x 2.4), and if it rose by 10% you would receive a 48% return (20% x 2.4). The maximum return is capped at 72% of your initial investment. If the plan does not kick out and the FTSE has fallen more than 10% on the final day of plan, no growth will be paid and your original investment will be returned in full unless the FTSE has fallen by more than 50%. If it has, your capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.
Fair Investment view: “This plan could be an opportunity for investors concerned about the historically high level of the FTSE and would therefore like to include a defensive element to their investment. By receiving well over double any rise in the Index, the plan also offers investors the opportunity to beat the stock market. The maximum potential growth return of 72% is equivalent to just under 9.5% compound annual growth.”
Following this defensive theme but combining the opportunity to mature early as well, is the FTSE 100 Defensive Kick-out Plan from Investec. This plan will return 7% for each year invested (not compounded) provided the Index at the end of each year (from year 2 onwards) is above 90% of its value at the start of the plan. This investment could therefore have the following outcomes in 2 year’s time:
- the FTSE has risen 30%, you receive 14%;
- the FTSE has risen 10%, you receive 14%;
- the FTSE is at the same level, you receive 14%;
- the FTSE has fallen almost 10%, you receive 14%;
- the FTSE has fallen by more than 10%, your investment continues to the next year.
The plan also contains conditional capital protection which means that your initial investment is returned in full unless the FTSE 100 falls by more than 50% during the term and is also below 90% of its starting value at the end of the 6 year term. If it is, your initial capital will be reduced by the same amount as the fall in the Index, so you could lose some or all of your initial investment.
Fair Investment view: “When the FTSE 100 reaches close to its all time high, it is understandable that investors may be thinking twice before committing their capital. For those investors who are not confident that the FTSE will continue to rise, or would like the potential for a competitive return even if it falls up to 10%, this plan could offer an attractive balance of risk versus reward.”
For those looking for the potential for double digit growth returns then one of our most popular is the Dual Index Enhanced Kick Out Plan from Investec where your returns are dependent on the performance of the FTSE 100 Index and the S&P 500 Index. If both Indices at the end of each year (from year 1 onwards) are higher than their values at the start of the plan, the plan will return 12.5% for each year invested (not compounded). Capital is returned provided both Indices finish above 50% of their starting values but if one or more Index finishes below this level, your initial investment is reduced by the same percentage as the worse performing Index, so your capital is at risk.
Fair Investment view: “The opportunity to receive 12.5% in as early as 12 months is a compelling one but since any growth and the return of your initial capital is based on the performance of both the FTSE 100 Index and the S&P 500, investors should understand the correlation between these two indices before proceeding.
No annual management charges
All of the ongoing charges associated with each plan are taken into account in the headline return so there are no annual management charges and no hidden surprises. This should be compared to a typical UK equity fund or portfolio which will often have total annual charges in excess of 1%. This annual cost associated with the management of funds perhaps helps to explain the number of funds which find it difficult to outperform the FTSE, especially over the medium term. This ongoing cost is not a feature of fixed term investments.
Make the most of this valuable tax break
The main reason for making sure you use your annual ISA allowance each year is the tax break. No tax is payable on the income you receive or any capital gains that you make, and there is no need to declare any ISA income or capital gains on your tax return. Investment ISAs therefore provide tax efficient income and growth, the value and benefit of which is compounded over time. Please note that tax treatment depends on legislation and your individual circumstances which may change in the future.
Dual tax year – act now
All of the plans detailed above are available as a new 2013/14 Stocks & Shares ISA and will also accept ISA transfers with most allowing you to take out your ISA for the next tax year (2014/15, allowance of £11,880) at the same time as the current tax year. Remember, Cash ISAs can now be transferred to Stocks & Shares ISAs but once transferred, you cannot then move it back into a Cash ISA at a later date. Application deadlines apply.
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
These are structured investment plans which are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index or any shares listed within the Index is not a guide to future returns.