The need for income is at the forefront of every saver and investor, whether you are working and need to supplement your earnings, or retired and looking to add to your pension income. The need for income is one of the most common demands put on our capital and with the pressures we all face from low savings rates and challenging stock market conditions, we take a look at one particular solution that is proving popular with our income seekers.
Savers and investors versus the economy…
The economic landscape continues to challenge both savers and investors whilst those looking for income are affected as much as anyone. Interest rates remain at 0.5% as they come close to six years at this record low, and despite inflation recently falling to equal its record low of 0.5%, many salaries have been frozen and earnings are still struggling to keep up with the cost of living.
Combined with annuity rates offering low returns as a yield on capital and the need for income is clear, albeit a significant challenge for many. Against this difficult economic backdrop therefore, it is at least reassuring that there is an investment plan which on balance could make for a compelling option for income investors as well savers prepared to risk their capital in the hunt for higher returns.
In a nutshell
The FTSE Income Accumulator from Morgan Stanley is a relatively straightforward investment to understand. The plan recently re-launched and the latest issue offers investors a yield of up to 6.75% and has a fixed term of six years. Your capital is at risk if the FTSE 100 Index (the FTSE) is below 4,000 points at the end of the investment term. This is known as conditional capital protection and is one of this type of plan’s main differentiators when compared to UK equity income or other investment funds.
Potential for up to 6.75% income
This investment has already proved popular since its re-launch last week and one of the reasons is the potential headline yield of 6.75%. For each week the FTSE is between 5,000 and 8,000 points, income will be accrued with a payment being made each quarter. If the FTSE falls outside of this range on any weekly observation date, no income will be added for that week which means you would miss out on income during those weeks only rather than the whole quarter.
Should the FTSE remain within this lower and upper limit for each week during the quarter, the maximum income payment of 1.6875% will be made. This equates to an annual income of 6.75%.
Another popular feature is the quarterly payment frequency since this provides a regular opportunity to receive an income payment while a number of equity investment funds only offer twice yearly payments. Therefore, not only does the investment provide the potential for a competitive level of income, but it also pays this on a quarterly basis which could be attractive if you are looking for the opportunity to supplement existing income.
Inflation hits 15 year record low
The rate of inflation as measured by the Consumer Price Index fell to 0.5% in the year to December 2014, according to official figures from the Office for National Statistics announced last week. This represents a fall of 0.5% on the previous month and is the joint lowest level on record. The last time inflation fell by 0.5% in a single month was May 2000.
The key contributors to this significant fall in the Index are the plummeting price of oil,. which meant that the cost of motor fuels fell by 10.5%, as well as stagnant gas and electricity prices compared with energy price increase a year earlier. Food prices also dropped by 1.9%.
Deflation on the cards?
The effect of lower oil prices, plus the ongoing price war between the high street supermarkets, and it is likely that inflation will remain below 1% for some months, although some see further falls as a possibility. Capital Economics UK economist, Paul Hollingsworth, said he felt inflation still had further to fall as there was still some way to go before the reduction in the oil price was fully accounted for in the headline rate.*
Commenting on the recent fall, he stated “the further 20% or so fall in oil prices since December’s average level looks set to push CPI inflation to a record low of around 0.2% over the next couple of months… and given uncertainties surrounding how quickly and to what extent lower oil prices will cause price rises for other goods to moderate, a brief period of deflation is not entirely out of the question.”
The need for income remains firmly at the top of the investor’s New Year priority list and as the hunt for high yield opportunities continues, being able to understand and compare the numerous options available is becoming more important than ever. So what better place to start 2015 than with our first Investor’s Guide of the year where we give you an overview of range of income options on offer, as well as compare some of our most popular investment ideas from last year and their main differences.
Why is income a top priority?
There’s no denying that generating an income is one the most common demands placed on our capital, even more so as low interest rates appear to be with us for some time to come and there remains an inevitable uncertainty around what might happen to inflation in the coming years. Whilst annuity rates also remain low and many salaries and retirement incomes fail to keep up with the real cost of living, it is understandable why income remains a top priority, regardless of our stage in life.
If you are already starting to plan your 2015, a good place to start is to look back over the previous year and see what proved popular with savers and investors. To this end, we start the New Year with a round up of our Plans of the Year for 2014 to give you the opportunity to know what has proved popular over the last 12 months with both new and existing Fair Investment customers.
The plans featured are spread across six different categories, two capital protected savings plans and four investment plans. By covering traditional fixed rates bonds, Financial Service Compensation Scheme (FSCS) protected savings alternatives along with income and growth investments, this annual review aims to cover a range of options for both savers and investors, whether seeking either income or growth. The 2014 categories are as follows:
- Fixed Rate Bond Plan of the Year
- Savings Alternative Plan of the Year
- Income Investment Plan of the Year
- Growth Investment Plan of the Year
- Defensive Investment Plan of the Year
- Kick Out Investment Plan of the Year
Whether it is the potential for higher returns combined with FSCS deposit scheme protection on offer from structured deposit plans, or the conditional capital protection combined with the potential for higher returns from our selection of income and growth investments, structured plans continue to be popular with our customers. In either case, the defined return and defined risk on offer from these fixed term plans has had an obvious appeal with both savers and investors, which is why five of our six categories are structured plans.
Winner & Runner Up
In addition to the winner for each category, where there has been particularly strong competition we have also awarded a runner up spot. Please note since the best plans are often only open for a relatively short period or can have their interest rate changed quickly, sometimes without notice, each plan selected must either be available now, or we are shortly expecting to launch a new version. So make sure you check for any application deadlines.
Finally, we also give you our in-house view of each plan, brought to you by our Head of Savings and Investments, Oliver Roylance-Smith, to help explain why the plan has been selected, whether this is a particular feature of the plan, the return on offer or the balance of risk reward when compared to its competitors.