Monthly archive for April, 2015

10 reasons to consider structured investment plans

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Structured investment plans offer certain features which make them unique within the wide range of investment options available in the market. Here we give you our Top 10 reasons to consider this type investment.

1. Defined return and defined risk

One of the main features of structured investments is that the potential returns on offer are stated up front, and so are known before you commit your capital. This allows the investor to consider the potential upside in the context of the amount of risk they are taking, since you know at the outset exactly what needs to happen in order to achieve any stated returns as well as a return of your initial investment. This can then be used to make an informed decision about whether to proceed or not by comparing the defined return and defined risk, with alternative investments as well as the returns available from cash deposits.

2. Some capital protection against a falling market

Understanding the risk versus reward of an investment is an important consideration, especially since the opportunity to receive higher returns than might be available from cash deposits inevitably requires the investor to put their capital at risk. Structured investments nearly always contain what is known as conditional capital protection, which means that provided the underlying investment (commonly the FTSE 100 Index) does not fall by more than a fixed level or percentage (usually 40% or 50%), your initial capital will be returned in full.

This fall is measured either throughout the term of the plan or at the end of the investment only, and means that the investor can take more of an informed decision based on whether they consider this to be a fair trade off for the potential upside. If the underlying investment does fall below this ‘barrier’ your capital will be reduced by 1% for every 1% fall, and so there is a risk that you could lose some or all of your initial capital. Also remember that past performance is not a guide to future performance.

3. Fixed term

Structured investment plans also have a fixed term, normally between 5 and 6 years. With most income and growth plans this means you know the term of the investment at the outset so can plan around this accordingly. Although you do have the option to withdraw your money during the term, early withdrawal could result in you getting back less than you invested and the plans are really designed to be held for the full term.

Another popular structured investment is the autocall, or ‘kick out’ plan as they are more commonly known. These plans have the potential to mature early, or ‘kick out’, on set dates during the plan, often as early as the end of year one. Whether they do or not is dependent on the performance of the underlying investment usually being higher that its value at the start of the plan. If it is, the investor receives the stated return along with a return of their initial capital, but if the plan does not kick out during the full term of the investment, your capital will at risk as with other types of plans.

4. Potential to beat the market

Since many structured investments are designed to provide returns even if the market has stayed relatively flat, investors also have the potential to beat the market. Kick out plans are a good example of this whereby even if the underlying investment is only up by a small amount, the plan may mature early providing investment level returns as well as a full return of capital, thereby offering the opportunity to outperform the underlying investment.

5. Defensive investments

Another feature which is unique to structured investments is that some plans are designed to produce investment level returns even if the stock market falls up to a specified level (which is known at the outset). With the FTSE recently reaching its highest level on record, some investors are perhaps thinking twice about investing right now. So for those who are uncertain that the market will continue to rise in the coming years, this type of plan, collectively called defensive investment plans, may well appeal. The opportunity to achieve a return on your capital even if the underlying investment falls in value shows a unique feature of structured investments being able to achieve investment level returns in what would be considered poor market conditions.

Click here to compare defensive investment plans »

6. Fixed income investments

Some of our most popular structured investments are income plans, which offer a fixed and regular income. This means you know exactly how much income you will paid, when and for how long, which is unique within the range of investment options available in the market. Since most income investments have variable incomes, it is perhaps understandable why these fixed income investments have proved so popular. Some of these also offer monthly payments since this seems to be the most useful in terms of budgeting, especially if you are looking to supplement existing income. Many other income investments that promote their yield only offer biannual or quarterly payments.

Click here to compare fixed income investment plans »

7. No ongoing charges

All of the charges within structured investment plans are taken into account in the headline return, so there are no hidden surprises. This should be compared to a typical UK equity fund which will often have annual costs associated with the management of funds. These charges are levied each and every year in both actively managed and tracker or ‘passive’ funds, which in part helps to explain the number of funds which find it difficult to outperform the FTSE 100 Index, especially over the medium term. This ongoing cost is not a feature of structured investments.

8. Tax efficient – New ISA friendly

All of the structured investment plans that are available through Fair Investment Company accept New ISA investments (current 2015/16 limit of £15,240) and you are also able to transfer existing Cash ISAs and/or Stocks & Shares ISAs. Any income or growth returns paid from an investment held within an ISA is not then subject to tax, an attractive feature in any economic climate. Since these investments are normally offered for a limited period, please always note any New ISA or ISA transfer application deadlines. Please note that this information is based on current law and practice which may change at any time.

9. FTSE linked

Many structured investment plans are linked to the performance of the FTSE 100 Index, which is widely recognised as the proxy benchmark for most investment managers. Since the historical volatility is familiar to many investors, they are in a better position to consider the pros and cons of the plan within the context of the underlying investment.

10. A disciplined approach

Finally, the mechanics of these investments removes the need for the investor to worry about when to come out of the market since the decision is made for them by the pre-determined market conditions required for the plan to mature or it simply comes to the end of the plan term. Should the plan mature, the investor then has the opportunity to reassess their options based on the market conditions at that time.

Click here for the latest income investment plans »

Click here to compare fixed income investment plans »

Click here to compare defensive investment plans »

Click here to compare kick out investment plans »

Click here for our experienced investor section »

 

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 legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

Different types of investment carry different levels of risk and may not be suitable for all investors. Structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also 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 which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested 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 their future performance.

Investment Focus – FTSE Quarterly Contingent Income Plan

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Income investments are without doubt our most commonly requested investment plan, whether by investors looking to use their ISA allowance, or income seekers simply adding to or transferring existing investments or portfolios in the hunt for a high return and regular income. We therefore take a look at a popular new entrant income plan, aimed at the more cautious investor who is looking to combine the potential for a high return and quarterly income, along with some capital protection against a falling stock market.

Income, income, read all about it…

Income is without doubt the most common demand put on our capital and as the need commonly increases the older we get and we start to reduce our working hours or look towards retirement, so the challenging task of finding a competitive income solution becomes increasingly important. As we continue to face income pressure from sustained low interest rates and with future uncertainty around what the recently record-breaking FTSE might yield in the coming years, the balance of risk versus reward on offer from this plan is certainly worthy of consideration.

Plan summary

The FTSE Quarterly Contingent Income Plan from Focus (Credit Suisse acting as counterparty) is a relatively straightforward investment to understand. The plan offers investors an annual yield of up to 6% and has a maximum fixed term of six years, although it could also mature early or ‘kick out’ at the end of each quarter from year three onwards. Your capital is returned if the plan does mature early, or at the end of the term provided the FTSE 100 Index (the FTSE or Index) has not fallen by more than 40% from its value at the start of the plan. If it has, your initial capital is reduced by 1% for each 1% fall in the Index, so you could lose some or all of your initial investment.

Potential for up to 6% income

This investment has already proved popular since its launch and one of the reasons is likely to be the headline yield of up to 6% on offer. For each quarter the FTSE ends above 75% of its value at the start of the plan, a 1.5% income payment is paid for that quarter. If the FTSE is more than 25% below, no income will be paid for that quarter. Should the FTSE remain above this 75% ‘barrier’ at the end of each quarter the maximum income payment of 1.5% will be made, which equates to an annual income of 6.0%. This means that the investor knows exactly what needs to happen in order to provide the stated level income, when each income payment becomes due, as well as how long any income payments are payable for.

Quarterly payments

Another popular feature is the quarterly payment frequency since this provides a regular opportunity to receive an income payment. So 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.

Fixed term, but also with the potential to ‘kick out’…

The FTSE Quarterly Contingent Income Plan has a six year fixed term and although you do have the option to withdraw your money early, the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested. The fixed term will though appeal to those who wish to plan around this. The plan also has the ability to mature early or ‘kick out’, which will occur if the Index has gone up by 5% or more at the end of each quarter, from the end of year 3 onward. If it does, the final income will be made and your original capital will be returned in full, otherwise the plan continues as before.

Conditional capital protection

If the plan fails to mature early then your capital is returned in full unless the FTSE 100 Index has fallen by more than 40% from its starting value. This is known as conditional capital protection and offers investors some capital protection against a falling stock market. If the Index has fallen below this level then your original capital is reduced by 1% for each 1% fall. In this situation at least 40% of your initial investment would be lost so you should understand that your capital is at risk and that you could lose some or all of your investment.

Compared to investment funds

Although there are many attractive headline yields advertised by investment fund managers, particularly in the UK Equity Income sector, it is important to remember that as with the FTSE Quarterly Contingent Income Plan, these yields are not guaranteed and are subject to fluctuations. In addition, the treatment of your capital with investment funds is different to the investment plan since there is no conditional capital protection – your capital is fully at risk on a daily basis and can therefore go up and as well as down.

This is an important difference since the income yield and any rise or fall to your original capital should always be considered together since both have an effect on your overall return. For example a 6% income yield on an investment fund is compelling in its own right but not so if it coincides with a 6% reduction in the value of your capital. However, remember that this can of course work in your favour if capital growth is positive.

Risk v reward

The principle of risk v reward means that the search for potentially higher returns leads to the need to put your capital at risk. A good benchmark for assessing any investment is to compare what you could get from cash over a similar timeframe. Although there is not a market for six year fixed rate bonds there has historically been a healthy market for longer term fixed rates with five year fixed rates traditionally offering the higher returns as compensation for you committing your capital for longer.

Anything around 3% is currently market leading for a five year fixed rate bond with considerably lower rates on offer for fixed rate Cash ISAs: and so by accepting risk to your capital you have the potential to at least double the income on offer. Remember this plan also has the potential to mature early each quarter from the end of year 3 onwards. One of the key considerations therefore is to decide whether you are comfortable with putting your capital at risk in conjunction with the conditional capital protection on offer, in return for a potentially higher level of income.

Credit ratings and agencies

Unlike a fund, your investment is used to purchase securities issued by Credit Suisse, and so their ability to be able to meet their financial obligations is also an important consideration. This is known as credit risk and means that in the event of Credit Suisse becoming insolvent and going into liquidation, you could lose future returns and some or all of your initial investment. These investments are also not covered by the Financial Services Compensation Scheme for default alone.

One accepted method of determining credit worthiness of a company is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit agency and as at 31st March 2015, Credit Suisse has been attributed a long term ‘A’ credit rating with a negative outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments but could be more susceptible to adverse economic conditions than companies in higher-rated categories, while the negative outlook indicates that the rating may be lowered in the short to medium term (between 6 months to 2 years).

About Credit Suisse

Credit Suisse is one of the world’s leading financial services providers operating in over 50 countries. Founded in 1856, they now serve around 2.1 million clients around the world, operating as an integrated bank with business split between two divisions: Private Banking & Wealth Management and Investment banking. They are also one of the largest global asset management businesses, with assets under management of almost £950 billion (as at March 2015). They employ around 46,000 people in more than 122 offices around the world.

Fair Investment conclusion

Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “When considering investment options, it is important to fully understand how each works and the risks that one takes on. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remember that it is the income and capital loss/rise combined that effect your overall return.”

He continued: “Structured investment plans offer certain features that are unique within the range of income investments available, not least the combination of the potential for investment level returns along with conditional capital protection. The opportunity for up to 6% income even if the FTSE falls up to 25% is attractive in the current market, especially when you consider the conditional capital protection as well. This plan therefore offers a compelling balance of risk versus reward which could appeal to both savers and investors alike.”

Please note the application deadline for this plan is approaching. We are also expecting a second issue of this plan.

Click here to find out more about the Focus FTSE Quarterly Contingent Income Plan »

 

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 legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

This is a structured investment plan that is not capital protected and is 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 is not a guide to its future performance.

New ISA allowance all wrapped up with our ISA season best seller

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The start of the new tax year brings with it a new and increased ISA allowance, which is open to every adult in the UK and is available right now. The recent Budget confirmed the ISA allowance would increase by inflation so the current 2015/16 tax year limit stands at £15,240 and has been available since 6th April. For investors looking for tax free income and who want to make the most of this new allowance straight away, we take a closer look at our most popular income plan during the recent ISA season and explain why it might be a compelling option for all those seeking income, both savers and investors alike.

Investors seeking income

Whether you are new to investing or a seasoned investor, the need to generate an income is one of the most common demands put on our capital and can cover a wide range of savings scenarios. If you are one such investor actively seeking income then this fixed income investment plan is certainly worth a closer look.

In a nutshell

For those who wish to get the tax year off on the right foot, the Enhanced Income Plan from Investec is our most popular income plan this ISA season. The current version offers investors a fixed income of 5.04% each year for a six year term and pays income to you each month (equivalent to 0.42% per month). Your capital is at risk should the FTSE 100 Index (‘the FTSE’) fall by more than 50% during the term of the plan and fails to recover by the end of the plan term, in which case you could lose some or all of your initial investment. This is known as conditional capital protection and is one of the investment plan’s main differentiators from other types of income investments.

A high fixed income

A fixed income is rather uncommon amongst income investments which normally offer a variable income based on prevailing market conditions and the performance of the underlying investments. This is therefore a popular feature since it provides investors with the knowledge of exactly how much income they will receive, when and for how long. When held within an ISA, the 5.04% fixed income is also paid tax free. This is equivalent to basic rate tax payers receiving 6.3% interest and higher rate tax payers 8.4%.

Compared to cash

Since this investment offers a fixed income over a fixed period, it is relatively easy to compare those elements with cash and a guaranteed return that you would receive from a fixed rate bond of similar duration (subject to the bank/deposit taker remaining solvent). Although there is not a market for six year fixed rate bonds there has historically been a healthy market for longer term fixed rates with five year fixed rates traditionally offering the higher returns as compensation for you committing your capital for longer. Unfortunately the market here has declined with leading rates currently offering no more than 2.50%. This investment therefore offers a premium of 2.54% in return for putting your capital at risk.

So the main question to consider is whether you are prepared to risk your capital in return for just over double the interest you could receive from the current market leading fixed rate Cash ISA, where the return of your capital at the end of the term is protected. Is the additional 2.54% income each year worth the risk that the FTSE may fall by more than 50%?

Compared to investment funds

Some of the yields available from investment funds certainly catch the eye, with many bond funds offering yields in excess of 5%. There are three main differences between the Investec fixed income plan and investment funds:

Variable income

The income from investment funds is not guaranteed and is dependent on the underlying holdings and market conditions. Since these will vary over time, so too will your income. The income from the Investec plan is fixed and so remains the same throughout the term.

Capital risk

The treatment of your capital is different to the Investec plan in that there is no conditional capital protection – your capital is fully at risk on a daily basis. This is important since the income yield and any rise or fall to your original capital should always be considered together since both have an effect on your overall return. For example a 6.60% income yield could be compelling in its own right but not so if it coincides with a 6.60% reduction in the value of your capital.

Diversification

An investment fund generally invests in a number of holdings and with bond funds this can sometimes be in the hundreds. This has the effect of spreading the risk of your investment so if one of the holdings fails or falls in value significantly, it has less of an impact on your overall return. Your investment into the Investec plan buys securities issued by Investec Bank plc only and so your income and return of capital is also dependent on their ability to meet their financial obligations. This means the credit rating of the Bank becomes an important consideration.

Also remember that investment funds have annual management charges (normally up to 1%) which have an impact on the overall performance. There are no annual management charges associated with the Investec Enhanced Income Plan.

Fair Investment conclusion

When considering income investments it is important to understand fully how each investment works and the risks it entails. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remembered that it is the income and capital loss/rise combined that produce your overall return and this is before tax is taken into consideration.

Commenting on the Enhanced Income Plan from Investec, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “As an alternative to open ended investment funds, the defined return and defined risk offered by fixed term investments offer investors an alternative approach to achieving income and an often competitive balance of risk versus reward.”

He continued: “Their conditional capital protection means that your initial investment has some protection against a falling market and the high level of fixed income, monthly payment frequency and fixed term provide a range of features that could be attractive to both savers and investors. Which of these features is the most appealing will vary among investors, but could equally appeal to fixed rate savers prepared to put their capital at risk in return for a high fixed income.  Where else can you receive 5.28% fixed income each year, paid to you regardless of what happens to the stock market? It is therefore understandable why the Enhanced Income Plan from Investec Bank has been one of our most popular income investments.”

The plan is open for new investment ISAs (£15,240 limit), Cash ISA and Stocks & Shares ISA transfers and non-ISA investments with a minimum investment of £3,000.

Click for more information about the Investec Enhanced Income Plan »

Click here for our Select Range of bond income funds »

 

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 depends on current legislation and your individual circumstances which may change in the future. Before transferring an ISA please check there are no penalties for withdrawal from your existing ISA provider.

The Investec Enhanced Income Plan is a structured investment plan that is not capital protected and is 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 is not a guide to its future performance.

ISA savers 2 minute guide to the Budget

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Further to last month’s Budget speech by the Chancellor, George Osborne, we give you a quick round up of the main changes around ISAs and what this will mean for both cash savers and investors.

New tax year, new limits – an even bigger allowance

From July last year, Mr Osborne significantly increased the annual ISA allowance to £15,000, allowing savers to squirrel more money away from the taxman than ever before; and because the allowance now rises in line with inflation, since 6th April 2015, the annual ISA investment limit for 2015/16 has risen by £240 to £15,240. Every UK adult gets their own allowance, so couples can save twice that amount. The limit for the Junior ISA (JISA) has also risen by £80 to £4,080.

Radically more flexible

A significant reform is that savers now have the freedom to withdraw and replace money in the same tax year without it counting towards their annual ISA allowance limit for that year, as long as the repayment is made in the same tax year as the withdrawal. This means ISA are now fully flexible so you can withdraw money without losing your tax benefits, provided you pay it back in by the end of the financial year. In the past, money taken out of an ISA lost its tax free status so any additional payments would count towards your ISA allowance for that tax year.

Junior ISA flexibility

In a change aimed at the younger generation, families who have taken out a child trust fund (CTF) can now convert it into a Junior ISA CTF’s were a tax-free savings wrapper for children born between 1st September 2002 and 2nd January 2011 which were replaced by the Junior ISA. Some CTFs have been unpopular with parents since they have combined disappointing performance with limited investment choice and high charges, although if you are considering transferring to a Junior ISA you will need to check that they are willing to accept the Child Trust Fund.

Passing on an ISA allowance

Further to an announcement made last December, married couples are now free to pass an extra ISA allowance, equal to the value of their ISA savings on death, to their surviving spouse. This means that couples can now pass the ISA tax breaks to each other however, passing the ISA tax status from parent’s to children is still not permitted.  When the surviving partner dies, they will continue to fall inside the family estate for inheritance tax purposes.

“Help to Buy” ISA

A new “Help to Buy” ISA scheme was also announced, aimed at helping first-time buyers get onto the property ladder. Under the scheme, for every £200 a first-time buyer saves, the Government will top up the deposit with £50 up to a maximum of £15,000 in total. So, if a first-time buyer saves £12,000, the Government will add a £3,000 ‘bonus’ to the pot. Savers will have access to this money and will be able to withdraw funds from the ISA account if they need them for another purpose, but the bonus will only be made available for those using the money for a home purchase. The Help to Buy ISA will only be available on houses worth £250,000 or less, or £450,000 or less in London.

And remember the additional changes in place since last year:

  • The ban on transfers from Stocks & Shares ISAs to Cash ISAs has been removed, thereby allowing full two-way transferability between deposits and investments and vice versa.
  • The rule which prevents more than 50% of the total limit being placed in a Cash ISA has been scrapped and so the entire £15,000 NISA contribution limit can go into cash deposits, or any combination of cash and stocks and shares.

Non-ISA changes

The Chancellor also confirmed tax breaks for non-ISA savings, via the introduction of a new “personal savings allowance” which will reward savers by not taxing the first £1,000 of savings income for basic rate savers, and the first £500 for higher rate taxpayers. Additional-rate taxpayers will not benefit. Mr. Osborne said that this reform would abolish the tax on savings for 17 million people.

Fair Investment view

Commenting on the Budget, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited said: “The addition of the £1,000 savings allowance has largely removed the benefit of increased flexibility for Cash ISAs and with savings rates as they are, many savers may now consider the use of a Cash ISA unnecessary. But investors and those looking to achieve the potential for higher returns than cash has been able to offer in recent years, are the real winners from this year’s Budget. The latest ISA reforms have left investment ISAs more generous, flexible and tax-efficient and a couple can now save up to £30,480 knowing that any income or capital gains will not be subject to tax in the future. Used in the right way, this could build up substantial sums in a relatively short period of time.”

For more information, see some of our most popular Investment ISA pages below:

Click here for our Top 10 NISA Investment Plans »

Click here to compare our selection of Investment ISAs »

Click here to compare our selection of Share Dealing and Self-select ISAs »

 

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 plan. If you are at all unsure of the suitability of a particular product, 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.