Monthly archive for September, 2017

Investment Focus: Investec FTSE 100 Defensive Income Plan

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Last updated: 07/11/2017

With the increase to 2.9% for inflation over the 12 months to August, the focus on income and what we are earning from our capital is most certainly on the up as well, with many investors looking for the opportunity to secure more income in order to counter the effects of this rise in the cost of living. Despite only on its third issue, the FTSE 100 Defensive Income Plan from Investec is proving to be one of our most popular income investments ever, with the opportunity to receive a high level of income, even if the stock market goes down by up to 40%, thereby giving the plan an attractive balance of risk versus reward. Here we take a closer look at what exactly the plan has to offer.

Plan overview – income

The FTSE 100 Defensive Income Plan from Investec offers investors an annual income of up to 7.25%. Income payments are made quarterly, and the plan has a maximum fixed term of eight years, although it could also mature early or ‘kick out’ at the end of each year from year 2 onwards.

Plan overview – capital

If the plan does mature early, your capital is returned with your final income payment. If the plan runs for the full eight years, you will receive your initial capital provided the FTSE 100 Index has not fallen by more than 40% from its value at the start of the plan. This is known as conditional capital protection and is unique to structured investment plans such as this. If it has fallen below this level, 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.

FTSE linked

The plan is linked to the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’), with both the level of income you receive, and the treatment of your initial capital, dependent on what happens to the FTSE in the coming years. The FTSE 100 Index tracks the share prices of the 100 largest companies listed on the London Stock Exchange, and is widely recognised as the proxy benchmark for most investment managers, especially those investing predominantly in UK equities.

Potential 7.25% annual income

The FTSE is measured at the start of the plan, and then again at the end of each quarter thereafter. If the Index is above 80% of its starting level (i.e. it can fall almost 20%), a 1.8125% income payment is made. If the Index has fallen by 20% or more, no income payment is made for that quarter. The plan also includes a second, more defensive option, which offers up to 5.50% per year provided the FTSE does not fall by 40% or more at the end of each quarter.

Defensive income

There are very few investments out there offering the potential for such high income yields, particularly when income payments can be achieved even if the FTSE falls below its current levels. So for investors who are not confident the FTSE will rise in the future, but also want the potential to receive income that is significantly higher than the current rate of inflation, the Defensive Income Plan could be an attractive option.

Investment term

The FTSE 100 Defensive Income Plan requires an 8 year commitment from investors, which means that investors should be prepared to commit their capital for this length of time before investing. Although you are able to withdraw your money early, the plan is designed to be held for the full term and early withdrawal may result in you getting back less, or more, than you invested, since it is based on the market value as at the date of the withdrawal.

Kick-out opportunity

Despite having a maximum term of eight years, the plan also has the ability to mature early or ‘kick out’, which is also dependent on the FTSE. The plan will mature early in the event that the FTSE has gone up by 5% or more, annually from the end of the second year onwards. This means that should the FTSE increase by this amount in the future, investors will receive a final income payment along with a full return of their initial capital.

Conditional capital protection

Another feature of this plan is that it offers conditional capital protection. This means the initial capital invested is at risk if the FTSE falls by more than a fixed percentage, in this case, more than 40% below its value at the start of the plan. If it does, your investment is reduced by 1% for each 1% fall. For example if the FTSE fell by 39% then the investor’s capital is not affected, but if the FTSE fell by 41% then the investor would lose 41% of their capital. You should therefore only consider this investment if you are prepared to lose some or all of your initial investment.

Risk v reward

The principle of risk versus reward means that the search for potentially higher returns leads us to consider putting our capital at risk. A good benchmark for assessing the merits of an investment is to compare what returns can be secured from a fixed rate deposit over a similar timeframe (fixed income plus full capital protection), with the potential returns from the capital at risk product. One may then evaluate whether the risk to the capital is worth the opportunity to receive a potentially higher level of income.

Fair Investment view

Commenting on the plan, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith, said: “This plan has two options, one paying up to 7.25% unless the FTSE falls 20% or more, the other paying up to 5.50% unless the FTSE falls 40% or more. Receiving such a high income, even if the FTSE goes down, makes for an attractive investment opportunity in any climate, not least one where we are seeing a sizeable increase in the day to day cost of living.”

He continued: “The plan also has the ability to mature early and return a final income payment along with your initial investment, and provides some capital protection against a falling stock market in the event it runs the maximum eight year term. By combining high income potential, the opportunity for early maturity and conditional capital protection, it is perhaps understandable why this plan has generated a great deal of interest with our investors.”

This plan accepts new ISA investments up to the £20,000 ISA allowance, Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments. The minimum investment is £3,000.

 

Click for more information about the Investec FTSE 100 Defensive 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 is based on current law which may be 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.

Latest inflation, wage growth, interest rates and what this means for your savings

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The latest figures indicate that inflation bounced right back up to 2.9% in the month of August. This means that the headline rate of inflation continues at a level well above the Bank of England’s 2% target. What’s making matters worse is that earnings are not increasing anywhere near enough to keep pace, thereby increasing the financial pressures felt by many households in the UK. So it is vital to consider all of your options in light of the impact inflation and sluggish wage growth could have on your savings. We therefore take a closer look at what is happening in the UK and explore the possible ways to get the most from your savings.

Inflation Latest

UK inflation, as measured by the Consumer Price Index (CPI), dropped unexpectedly from 2.9% in May to 2.6% in June and remained at 2.6% for July. However, according to the latest figures from the Office of National Statistics (ONS), inflation returned to the heights of 2.9% in August.

The increase to 2.9% recorded in May and again in August 2017 is the highest inflation level since April 2012, the rate having slowly increased after a much welcome period of very low inflation during 2015. It may shock many savers to learn that inflation sat at just 0.9% a short 12 months ago.

Economists who witnessed inflation balloon by 2% in a year do not forecast a bright future for the next few months, as The National Institute of Economic and Social Research (NIESR), believe it will reach 3% by the end of 2017. This widely accepted pessimism was underpinned by the Bank of England’s (the Bank’s) Inflation Report in August, which predicted that inflation will likely peak at 3% as soon as October of this year.

The Future for Interest Rates

In line with the Bank of England’s recent summary, the Monetary Policy Committee (MPC) predictably voted by a majority of 6-2 to maintain interest rates at the record low of 0.25%. The recent decline in inflation may fill some with confidence that the Bank will raise interest rates soon. However, Charlie Bean, the former Bank of England’s deputy mused “it looks like the economy might be slowing, it seems like an odd time to increase interest rates”.

Upon review of the slow growth in the economy and the current rate of inflation, NIESR predicts that the Bank may increase interest rates in the first quarter of 2018, whilst Stuart Green of Santander Global Corporate Banking said that he “did not expect a rate hike to happen before 2019”. Either way, this does not fill us with a great amount of confidence.

Uncertainty

Some have suggested that the interest rate will not increase until after Brexit negotiations are finished and judging by the latest reports about the negotiations, it seems we could be waiting a long time before the Band of England decide to raise interest rates again.

Even though the question is not ‘if’ the Bank of England will increase interest rates but ‘when’, the rate is likely only to increase to 0.5%, and so the impact on savings rates is likely to be minimal in the short term, and only very gradual over time.

Lagging Wage Growth

With inflation and the question marks over whether to increase interest rates, UK households are enduring a prolonged period of sluggish wage growth. In the last four months wage growth has experienced the biggest drop since August 2014.

Unfortunately, the pressure on incomes is likely to continue as the latest forecast for pay rises sits at just 1%. Households all over the country are feeling the pinch and their wages just do not go as far as they used to, resulting in people spending less money. UK consumer spending is down for the third month in a row.

With less disposable cash, fewer people have been able to put money aside into their savings, and it is no secret that the less you put into savings, the less you will get from it. Ultimately this leads us to the same conclusion: it remains as important as ever to find the best returns on offer.

Savings Products

Fixed rate bonds have historically been the cornerstone product for many savers. However, the rates on offer from these accounts have probably changed more than any other in recent years. Continued reductions in the returns from fixed rate bonds have seen many savers suffering significant falls in the income received from their savings.

At the time of writing, there is not a single fixed rate bond that matches the rate of inflation, and as a result, many savers are losing money in real terms. What’s more, the best savings rates currently on offer from an instant access account provides around 1.25% AER, which sits well below the rate of inflation.

Do Your Homework

Despite the mounting pressure from potentially increasing inflation and sluggish wage growth, it is important to take the time to make the right decision for your financial circumstances. It may be appropriate to review the current amount of interest paid on all your savings and compare this with other savings accounts on the market.

Although the current crop of savings accounts do not come close to matching inflation, if you do not want to put your capital at risk then there are not many options available. However, making sure you have found the best deal for your savings has to be a top priority.

Compare Instant Access Accounts »

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Taking on More Risk or Face Losing Money in Real Terms

The harsh reality in today’s economic landscape is if you do nothing, your money is losing value in real terms so long as the interest rate you receive is lower than inflation. One course of action to combat the effect of inflation is to consider a change of strategy.

The current inflationary environment, along with the slow wage growth and poor interest rates, means that savers may have to consider taking on more risk with some of their capital, in order to try and replicate previous interest rates and secure better returns from their capital.

Capital at Risk Products

One alternative for savers is to consider capital at risk investment plans. These products offer the opportunity to secure competitive returns to potentially beat inflation. Though the capital is not directly invested in the stock market, the potential returns are generally linked to the performance of the FTSE 100 and so offer the potential for competitive rates of return when compared to fixed term bonds.

One such investment plan uniquely offers a fixed monthly income, paid to you regardless of what happens to the stock market, with only the return of your initial capital dependent on the performance of the FTSE 100 index (rather than your income as well).

Risk Versus Reward

Of course, it is important to note that these products do not provide the capital invested with complete protection, and there is a risk of losing some or all of the initial investment. When it comes to capital at risk products there is always a question of risk versus reward.

The principle of risk versus reward means that the search for higher fixed returns usually leads to the need to consider putting your capital at risk. A good benchmark for assessing your fixed rate investment is to compare what you could get from a fixed rate deposit over a similar time frame, and then consider whether you are prepared to accept the level of risk to your capital in return for the higher fixed rate.

In Conclusion

However you decide to proceed, the impact of lagging wage growth, low savings rates and the possibility of soaring inflation cannot be ignored. Although savings accounts offer complete protection for your capital, it seems that the record low savings rates are here to stay for the foreseeable future. This could result in savers’ capital diminishing in value and losing money in real terms but before considering capital at risk products, you must make sure you fully understand all of the risks involved before proceeding.

Click here to compare Instant Access Accounts »

Click here to compare Fixed Rate Bonds »

Click here to compare Fixed Rate investments »

Click here to compare Investment plans »

 

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.

The fixed income investment mentioned 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. This investment does not include the same security of capital which is afforded to deposit accounts.