Archive for the ‘Monthly income’ Category

NEW 5 year term – ISA fixed income best seller just got better

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With just over 5 weeks until the end of the tax year, now is the time to make sure you maximise your ISA allowance for the current 2016/17 tax year, before it is lost forever. So what better timing than for our best selling income plan to not only offer an enhancement to its product terms by reducing the fixed plan term from six years to five, but also to offer a Double ISA option whereby you can arrange the next tax year’s (2017/18) £20,000 ISA allowance as well. The appeal of a fixed income remains as strong as ever, whilst the ability to generate a high fixed income from capital remains limited. So here we take a quick look at the main features of the Investec FTSE 100 Enhanced Income Plan and what we expect will be a very popular plan this ISA season.

Income best seller

Whether you are working full-time or part-time and need to supplement your earnings, or retired and looking at ways to supplement your pension or savings income, the need for income is one of the most common demands put on our capital. Rather uniquely in the income investment space, this plan combines a high fixed income, with a fixed term and some degree of capital protection. These features have made it our best-selling income investment plan and a popular choice for our ISA investors.

High fixed income

Traditional investment funds normally pay a variable income dependent on the performance of the underlying asset, whereas this plan pays a fixed income regardless of the performance of the stock market. The current issue of the plan is paying 5.04% per year fixed, which means that the investor has the certainty of knowing from day one exactly how much they will receive. With longer term savings rates still at very low levels, the prospect of a high fixed income is likely to be attractive to a wide range of income seekers.

Monthly payments

Another popular feature is the monthly payment frequency since this is the most useful in terms of budgeting, especially when many UK equity income funds only offer quarterly payments. Therefore, not only does the investment provide a high level of fixed income, but it also pays this on a monthly basis, which could be an important feature when looking to supplement existing income. At 5.04% per year on offer from the latest issue, this equates to 0.42% paid each and every month for the entire term of the plan.

NEW 5 Year fixed term

The Enhanced Income Plan was first introduced in January 2013 and since its launch, the plan has always had a six year term. For this latest issue, Investec has been able to reduce the term to five years. This makes it the only income investment plan currently on offer with a five year 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 (or more) than you invested.

Some capital protection from a falling market

Unlike a traditional investment fund, the plan includes some capital protection from a falling stock market. This ‘conditional capital protection’ means that the return of your initial investment is conditional on the FTSE 100 Index not falling by more than 50% below its value at the start of the plan. If the FTSE stays above this 50% barrier throughout the plan term, you will receive a full return of your original investment when the plan ends.

Capital at risk

However, if the FSTE 100 Index does fall by more than 50% at any time during the plan term, and is also below its starting value at the end of the five year term, your initial investment is reduced by 1% for every 1% fall. Therefore this plan puts your capital at risk and you could lose some or all of your initial investment.

The use of averaging

When calculating the final level of the FTSE for the purposes of comparing it with its value at the start of the plan, the plan takes the average of the closing levels of the Index on each business day during the last 6 months of the plan term. The use of averaging can reduce the adverse effects of a falling market or sudden market falls, whilst it can also reduce the benefits of an increasing market or sudden increases in the market during the last six months of the plan.

Investment plans

This plan is a structured investment and so unlike investing in a fund where you would buy units at the prevailing price on the date of purchase, your initial capital is used to purchase securities issued by Investec Bank plc. These securities are structured in a way so that they aim to provide the fixed income and the return of capital as described above, and means that Investec Bank plc’s ability to meet their financial obligations becomes an important investment consideration. If the bank fails or becomes insolvent, this could affect both the payment of any future income, as well as the return of your original investment and you would not be covered by the Financial Services Compensation Scheme for default alone.

Investec credit rating

Fitch is one of the main global credit rating agencies and has awarded Investec Bank plc a credit rating of BBB with a stable outlook (awarded 3rd October 2016). The ‘BBB’ rating denotes a good credit quality and indicates that expectations of default risk are currently low and that Investec Bank plc’s capacity for payment of its financial commitments is considered to be adequate but adverse business or economic conditions are more likely to impair this capacity. The stable outlook indicates that the rating is not expected to change in the short to medium term, i.e. in the next 6 months to 2 years.

Investec Bank plc profile

Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, they currently employ around 9,000 people and as at 31st March 2016, look after £121.7 billion of customer assets. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their banking operation looks after £24.0 billion of customer deposits and they are also a market leading provider of investment plans and structured deposits in the UK.

Double ISA option

The current issue of the plan includes Double ISA functionality which means you can invest your ISA allowance for both the current tax year (2016/17) and the next tax year (2017/18) at the same time, using a single application form. The ISA allowance for the current tax year is £15,240, and for the 2017/18 tax year (starting 6th April 2017) it increases to £20,000. This means you could invest up to £35,240 into the Enhanced Income Plan, achieving a tax free income of £1,766 per year (£148 per month). Please note that application deadlines apply.

Fair Investment view

Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “Whilst longer term fixed rates on cash remain where they are, the pressure is clearly on to in terms of how we generate income from our capital, but also to think carefully before moving up the risk spectrum in the hunt for higher returns. Needless to say that the high level of fixed income and monthly payment frequency on offer from this plan are attractive features, whilst many fixed rate savers will be used to a fixed term which should also appeal to those investors who wish to plan around this.”

He continued: “By combining a fixed income with the criteria which need to be met before your capital is at risk, this plan allows potential investors to weigh up the risk versus reward prior to investing. In addition to paying a high fixed income rather than a variable income based on the performance of the stock market, and this plans sits very much on its own as an option for tax free income seekers.”

 

The plan is open for new ISA investments for the 2016/17 tax year (£15,240 allowance) and the 2017/18 tax year (£20,000 allowance), Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments. The minimum investment is £3,000.

 

Click here for more information about the Investec FTSE 100 Enhanced 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.

This investment does not include the same security of capital that is afforded to a deposit account. Your capital is at risk.

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.

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.

Savings Focus: Masthaven Bank launches with some market leading fixed rate bonds

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Last updated: 14/02/2017

Masthaven Bank is the latest bank to launch a range of fixed term deposits to the UK retail market and based on its initial range of products, looks set to be a real challenger, even amongst the challenger banks. So, if you have a minimum of £500 that you can tie up for at least 6 months, and you want to take advantage of some of the highest savings rates on the market, their first tranche of products is certainly worth reviewing. Here we take a closer look at what the bank has to offer savers.

Lending history

Masthaven is a brand new bank and the first new bank to be awarded a banking licence in 2016. However, they are not completely new to lending. Since 2004, they have been providing a flexible and personalised approach to lending in the specialist areas of bridging loans and secured lending (second charge mortgages), areas in which they remain one of the most competitive propositions in the market.

UK based fixed rate savings accounts

Headquartered in London, and with a knowledgeable and experienced team of savings specialists based in their UK contact centre, they have just launched their retail banking arm with a highly competitive range of fixed term and flexible term fixed rate savings accounts.

Masthaven Bank Fixed Term Bonds – up to 2.06% AER

Masthaven Bank’s fixed rate savings accounts are aimed at savers who are able to tie their money up for a fixed period, and are also looking for a fixed and regular rate of interest. They have four fixed term products, with terms ranging from 1 year to five years, and as you would expect, the rate of interest available increases with the length of term you choose: their 1 Year Fixed Term Bond pays 1.25% AER, whilst their 5 Year Fixed Term Bond offers a market leading 2.06% AER.

Summary of Fixed Term Bond rates

A summary of Masthaven’s fixed term bond rates is as follows:

  • 1 Year Fixed Term Bond:     1.25% AER
  • 2 Year Fixed Term Bond:     1.58% AER
  • 3 Year Fixed Term Bond:     1.76% AER
  • 5 Year Fixed Term Bond:     2.06% AER

Click here for more information on the Masthaven Fixed Term Bonds »

Masthaven Flexible Term Saver – create your savings account

Masthaven also offers the option to choose your own term, with their Flexible Term Saver. Terms can be selected in whole months, ranging anywhere between 6 months and 60 months, with rates between 0.60% AER and 1.96% AER respectively. This means you can tailor to the month the exact term you want, whilst also benefitting from a top rate of interest which is fixed for term of the account.

The Flexible Term Saver is an innovative account designed for customers who may be saving for a key event, such as a holiday of a lifetime, a wedding, university fees or a deposit for a house. The flexibility around term choice allows you to create a savings account based on your own needs and timeframes, so that you take advantage of a fixed interest rate but without having to sacrifice a competitive rate of return. Example interest rates are as follows:

  • 15 Month Flexible Term Saver:     1.33% AER
  • 18 Month Flexible Term Saver:     1.42% AER
  • 30 Month Flexible Term Saver:     1.67% AER
  • 48 Month Flexible Term Saver:     1.91% AER

See rates and find out more about the Masthaven Bank Flexible Term Saver »

How much can you save?

All Masthaven savings accounts have a minimum balance of £500 and a maximum balance of £250,000 per account. You may have as many savings accounts with them as you want at any one time, however there is a maximum total balance of £1,000,000 that can be held across all of their savings accounts. Any funds held jointly will count towards each of your own individual limits.

Interest

Interest will be calculated from the day on which you make your deposit and is calculated daily based on the funds held in your account. You can have interest paid either monthly or annually and importantly, interest can either be paid into an account of your choice, or added to the balance of your fixed rate bond account, in which case you can benefit from compound interest. Interest will be paid to you gross, without tax deducted.

Account set up

Each account can be set up as a single or joint account. Accounts are opened online and access to account information is online or via telephone. As with most fixed term accounts, no early withdrawals are permitted.

Financial Services Compensation Scheme

Masthaven Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority. As a UK regulated bank your deposits are protected up to £75,000 by the Financial Services Compensation Scheme (‘FSCS’). For further information about this protection you can read ‘How FSCS protects your money’ or you can visit the FSCS website.

The UK’s only owner-managed bank

Masthaven Bank was awarded the first 2016 retail banking licence back in April, and launched officially on 28th November with the suite of fixed term savings accounts detailed above. It aims to offer an alternative to the one-size-fits-all approach of many conventional banks, and is the UK’s only owner-managed challenger bank with a partnership model which at launch sees 80% of employees already shareholders in the business.

The Board of Directors is as follows:

  • The Chairman is Peter Harrison, ex-CEO of the UK Financial Services Practice at KPMG, Chairman of the Audit Committee of a FTSE 250 Company and ex-Chair of the Audit Committee for CIT Bank Ltd.
  • Andrew Bloom is CEO. After working for KPMG and Strand Hanson he founded Masthaven Finance in 2004. Andrew has built Masthaven into an award-winning mortgage, development finance and bridging finance provider.
  • Managing Director is Jon Hall who joined the business in December 2014. Previously Mr Hall was Chief Executive of Saffron Building Society where he grew the mutual’s ranking from 31st to 13th largest in the UK and the largest in Eastern England.
  • Three Non-Executive Directors join Masthaven’s Board: Anne Gunther, previously Chief Executive of Norwich & Peterborough Building Society and Standard Life Bank; Ashley Machin, who most recently was Chief Digital Officer at TSB Bank and Michael Baker, FD of Joint Ventures at the William Pears Group.

Access to this expert leadership team along with a strong team of support staff approaching 100 in number, combined with straightforward digital services, means Masthaven will offer what it calls human digital banking.

Click here to compare all Masthaven Bank fixed rate savings accounts »

 

Please note that Masthaven Bank fixed rate bonds are fixed term products which means you cannot withdraw your funds or close your account until the end of the agreed term.

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Fixed rate bond holders face significant falls: our roundup of the latest fixed rate options

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Last updated: 17/01/2017

For those bond holders with maturing accounts, many are facing significant falls in the level of returns on offer when comparing their maturing account with the current crop of fixed term deposits on offer, especially those coming out of four or five year fixed rate bonds. And yet despite this low interest rate environment, fixed rate bonds continue to play an important role for many savers. With this in mind, we give you a roundup of our latest fixed rate bond offers, as well as take a look at some of our most popular alternatives.

Fixed rate bonds a popular choice

With interest rates looking set to continue at their record lows for some time to come, and whilst top instant access accounts only offer around 1.0% AER, savers looking for the certainty of knowing exactly how much they will receive, when and for how long, still look towards the fixed rate bond which remains a popular choice for those wanting to combine a fixed return with full capital protection.

Short term: up to 2 years

Fixed rate bonds

For those looking at the shortest fixed terms, Habib Bank offer a 6 Month Fixed Rate Deposit paying 0.80% AER, whilst new entrants Zenith Bank and Masthaven Bank offer 1.30% AER and 1.35% AER respectively if you can tie your money up for a year with their 1 Year Fixed Term Deposit. Minimum deposits start as low as £500 and your deposits are eligible for the Financial Services Compensation Scheme (FSCS). Interest is paid at maturity and as is standard with most fixed term deposits, no withdrawals are permitted during the term of the bond. Zenith Bank also offers a top rate of 1.52% AER if you fix for 2 years with their 2 Year Fixed Term Deposit account, with deposits available from £1,000, whilst Masthaven’s 2 Year Fixed Term Bond is slightly more competitive at 1.53% AER with a £500 minimum balance.

Fixed rate Cash ISAs

Bank of Cyprus UK offer market leading rates in this category, with their 1 Year Fixed Rate Cash ISA paying 1.05%, and marginally higher at 1.10% AER if you want to fix for 2 years, both with a low minimum deposit of just £500. These accounts are available to anyone aged 16 or over and interest is paid annually into your Cash ISA. ISA transfers are permitted and eligible deposits are covered by the UK FSCS. Aldermore Bank offers a market leading 1.20% AER on their 2 Year Fixed Rate Cash ISA but the minimum is slightly higher at £1,000. Aldermore Bank is the five time winner of the Consumer Moneyfacts ISA Provider of the Year Award (2011-2015).

Medium term: 3 to 4 years

Fixed rate bonds

In the three to four year space, our top deal comes from the new kid on the block, Masthaven Bank, and their 3 Year Fixed Term Deposit, currently paying 1.67% AER. The minimum deposit is £500 and interest can be paid monthly or annually. For those looking specifically for monthly interest, United Bank UK’s 3 Year Fixed Term Deposit pays a slightly lower rate of 1.55% AER, but also offers a monthly interest option, in addition to having it paid annually or at maturity. No withdrawals are permitted from these accounts.

Leading our tables over 4 years is Vanquis Bank offering 1.85% AER and Masthaven Bank offering 1.84% AER with their 4 Year Fixed Term Bond, for those with between £500 and £250,000 to deposit. Both accounts have annual or monthly interest options, but no withdrawals are permitted during the term. Accounts can be opened in sole or joint names.

Fixed rate Cash ISAs

Bank of Cyprus UK continues to be very competitive in the fixed rate Cash ISA market with their 3 Year Fixed Rate Cash ISA, currently paying 1.20% AER and with a respectable minimum deposit of just £500. Aldermore are offering a higher rate of 1.25% AER fixed over 3 years with their 3 Year Fixed Rate Cash ISA whilst both of these accounts allow you to transfer in existing ISAs from other providers, and can be set up easily online.

Longer term: 5 years+

Fixed rate bonds

Although the highest rates are still rewarded with higher savings rates in return for locking your money away for longer, the interest rate gap between short term and longer term is also at record lows. For those prepared to commit their savings for five years, Vanquis Bank’s 5 Year Fixed Rate Bond is paying 2.00% AER with a minimum deposit is £1,000 whilst Masthaven Bank’s 2.01% AER is currently market leading and interest can be paid monthly or annually.

Fixed rate bond holders facing significant falls

Just over a year ago we were talking about savings rates of around 2.10% for a 1 year fixed rate, 2.35% for a 2 year fixed whilst a 3 year would get you 2.70% AER fixed. Our best rates above will earn you 1.35%, 1.53% and 1.61% AER respectively, equivalent to reductions of between 35% and 40%. And the situation is even worse for longer term bond holders. We have many customers who are coming out of five year fixed rates where the rate on offer was around 4.60%. Now, they are looking at 2.01% as the market leading five year fixed rate, a significant reduction in interest of 56%. For someone with a maturing lump sum of £50,000, this is equivalent to their income dropping from £2,300 per year to £1,005.

Investing for fixed income

It is therefore perhaps unsurprising that many fixed rate savers have had to consider a wider range of options than ever before in the search for higher levels of income, and in doing so this inevitably involves considering investments and the associated risk to your capital. One of the main issues facing those in this situation is that most traditional income investments only offer a variable income, and so comparing with a fixed rate bond can be more difficult. This is perhaps one reason which helps to explain why the Enhanced Income Plan from Investec has been such a popular plan with our customers.

Fixed income, fixed term

The plan offers a fixed income, which is paid to you regardless of the performance of the stock market, whilst the investment also has a fixed term, so you know exactly how much you will be paid and for how long. The current issue offers 5.04% fixed income each year, which is paid as 0.42% each month.

In addition to offering a fixed income, this plan is different to most investment funds in that is also offers some capital protection against a falling stock market. Known as conditional capital protection, this means that your original investment is retuned in full unless the FTSE 100 Index falls by more than 50% during the plan term. If it does, and also finishes the fixed term lower than its value at the start of the plan, your initial investment will be reduced by 1% for every 1% fall, so you could lose some or all of your initial investment.

The Enhanced Income Plan is also available as an ISA and accepts ISA transfers with a minimum investment of £3,000.

Cash versus investment – understand the risks first

One of the main differences between the fixed rate bond and the fixed income investment is that with the former, your capital is treated as a deposit and is therefore protected and returned to you at the end of the term, subject to the bank in question remaining solvent. You also have access to the deposit protection available from the UK FSCS.

An investment into the Enhanced Income Plan is used to purchase securities issued by Investec Bank plc, which means the bank’s ability to meet and repay their financial obligations is equally an important consideration. However, since this is not a deposit, you are not eligible for compensation under the FSCS for default alone, and as highlighted above, the return of your capital is also dependent on the performance of the FTSE 100 Index and so is at risk.

Risk v 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 timeframe, and then consider whether you are prepared to accept the level of risk to your capital in return for the higher fixed rate.

Our best five year fixed rate is currently offering 1.90%. By accepting risk to your capital, the Investec plan offers 5.04% over six years, thereby offering more than two and half times the level of income each year. The main risk is that your capital is at risk if the FTSE 100 Index falls below 50% and so once you have understood how the plan works, the decision then is whether you are comfortable with putting your capital at risk in return for the higher fixed return on offer.

 

Compare fixed rate bonds »

Compare fixed rate Cash ISAs »

Find out more about the Investec Enhanced 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. Always remember to check whether any charges apply before transferring an ISA.

The Investec Enhanced Income Plan is a structured investment plan which 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.

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Income versus Inflation: consider your options carefully

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Last updated: 14/02/2017

As if last month’s inflation increase to its highest level for 22 months was not bad enough, the talk this month of it possibly spiking to 4% or higher next year on the back of the Brexit vote, has created a number of serious concerns for both savers and investors. The result is that the income we generate from our capital is going to become more important than ever. With this in mind, we take a closer look at the impact the ongoing economic climate could have on anyone looking to take an income from their capital, as well as review some of the more popular options being considered by income seekers.

Inflation on the rise

The Consumer Price Index rose from 0.6% to 1.0% in September, the biggest monthly rise in more than 2 years and its highest level for 22 months. Although it is still some way off the Bank of England’s inflationary target of 2%, there also seems to be a general consensus that things are likely to get worse on the inflationary front, before they get better.

“Savings rates at record lows” – no news there then…

So, as if record low savings rates weren’t enough, this recent spike to the headline rate of inflation has added further pressure to the already difficult conditions that savers have had to endure in recent years. In fact, further to this rise, less than half of all savings accounts on offer can either match or beat inflation, resulting in more and more savers seeing the spending power of their cash being eroded. According to the Bank of England, the average easy access account now pays under 0.3%. So with further cuts to savings rates on the cards, inflationary rises are a serious cause for concern.

More bad news for savers

Savers are also facing more bad news since not only did the Bank of England’s cut to the base rate in August to 0.25% offer little hope of savings rates increasing any time soon, this move also had no impact on the pound, which has since fallen significantly against many of the major currencies. Most notably is the fall of sterling against the dollar, which recently saw a 31 year low against our North Atlantic neighbours, as the reality of a hard exit from Europe starts to take hold.

Serious concerns for those in retirement

Whilst a poor exchange rate boosts export orientated businesses and manufacturing, it also drives up inflation as the price of imports rise, with the most affected likely being food, then goods and services. This means that those in retirement will be hit particularly hard since they generally spend higher proportions of their income on these essentials. In fact, inflation is consistently cited as one of the most serious concerns for pensioners, along with the cost of care, running out of money and future changes to the state pension.

How high could inflation go? – the impact of a ‘hard’ Brexit

Experts agree unanimously that the fall in the value of the pound is likely to drive prices up, and the National Institute for Economic Research expects consumer price inflation to peak to 4% in the second half of next year, a significant jump from its current level. Some fund managers believe it could go even higher, possibly reaching 5%. This also means that the Bank of England is very unlikely to increase interest rates, with some suggestions that they will remain at their record low 0.25% until at least 2019.

You must take a view on inflation

This all combines to suggest an extended period of tough times for savers and is perhaps going to be one of the most difficult couple of years for anyone relying on income generated from capital, with cash savers undoubtedly hit the hardest. Although forecasts about short term changes could prove wrong, savers should be wary of focusing on the short term when it is the longer term impact of inflation which causes the most damage.

Remember, inflation is a backward-looking measure, i.e. it measures the rate of inflation over the last 12 months. It tells us little about what will happen in the next 12 months, let alone looking beyond this timeframe, and yet 1,000s of us each day make decisions which tie us in for much longer periods without considering its impact. You must take a view on the impact inflation might have, before you act.

A note on the Personal Savings Allowance

Remember that since the start of the current tax year (6th April 2016), most people receive a personal tax free allowance for interest earnings on savings. For basic rate taxpayers, this is set at £1,000 each tax year, whilst higher rate taxpayers get an allowance of £500. Beyond these allowances, basic rate taxpayers will pay 20 percent on savings income and higher rate taxpayers pay 40 percent (additional rate taxpayers will not receive a personal allowance). Also, note that income from ISAs does not count towards your Personal Savings Allowance (it’s already tax-free).

Income options and your net return

The net return on your capital is the amount you receive after tax and inflation has been taken into account. Thanks to the Personal Savings Allowance, many savers have had the impact of tax on their returns negated. However, inflation is still a critical factor, which is why the current economic backdrop should play an important role in deciding which route you decide to take with your capital. We therefore take a look at some of our most popular income options, and see how their returns stack up against the rising cost of living.

Fixed rate bonds

Historically the cornerstone product for many savers, these accounts have probably suffered more than any other in recent times. Consistent reductions in the returns from both short and longer term fixed rates have seen many savers facing significant falls (more than half) in the income they have enjoyed from their maturing fixed rate, when compared to the best on offer from bonds with the same duration available at maturity.

Savers face losing more than 50% of their income

One group that continues to face losing more than 50% of their income is the thousands of savers in the current crop of five year fixed rates that will mature in the coming months. These savers will have enjoyed a fixed rate of interest for the last five years, for example Scottish Widows Bank was paying 4.60% AER. By comparison, our best five year fixed rate currently on offer, from Masthaven Bank, only offers 2.06% AER. That’s a reduction of a staggering 2.54% per year, equivalent to a fall in income of 55%. Needless to say there are not many of us who can withstand this sort of drop in income without it having a significant impact.

To fix or not to fix?

The picture is a similar one for shorter term fixed rates. The best 1 and 2 year fixed rate bonds are currently paying around 1.31% to 1.58%, and although all of these rates are higher than the current rate of inflation, this will not provide a real return if either you are having to use the income to supplement your cost of living (so the actual value of your capital is being eroded), or inflation rises in the coming months and years. With such sharp falls in the level of interest on offer compared to a few years ago, this also means more savers will need to use capital to supplement their income, making their situation even worse over time.

Should you ultimately decide to commit to a fixed rate, then before applying make sure you fully consider the current economic conditions and the impact they might have over the full term of your fixed rate. There are clear inflationary pressures at the moment so you should be confident that rises to the cost of living will not increase significantly during the fixed term period, otherwise any inflation beating returns may well evaporate.

Beware the instant access trap

So as you can see, fixed rate bonds remain at record lows and inflation aside, it is the fall in income that savers are experiencing, especially from longer term fixed rates about to mature, that is causing the greatest concern. This has also resulted in a number of maturing fixed rate bondholders moving away from medium to longer term fixed rates in favour of instant access accounts, on the basis that something might happen relatively soon which will then spur them on to taking further action. This course of action currently offers little or no prospect of any real growth on your capital, your income will be considerably lower than from a fixed rate bond, interest rates are unlikely to go anywhere for some time, and should inflation move upwards as expected, this could prove to be a very disastrous strategy indeed.

Moving up the risk spectrum

The reality therefore is that savers sitting in cash will therefore continue to struggle to generate a real return, regardless of whether they remain in instant access savings or commit to a fixed rate of interest. This is likely to result in a rise in the numbers looking towards riskier assets to stand any chance of generating an inflation-adjusted real return, especially for income seekers who need to maintain a higher level of income to support their cost of living.

Savers looking to investments

Whilst the combination of low fixed rates and the potential for high inflation may force more of us to consider investing, this raises the difficult question of taking on more risk in an attempt to replicate historical levels of income enjoyed from deposit based products. Although most investments only offer a variable income, the fixed monthly income (currently 0.42% per month, equivalent to 5.04% per year) from Investec’s FTSE 100 Enhanced Income Plan has been a very popular choice with our investors. The plan also includes conditional capital protection, so your capital is returned at the end of the fixed term unless the FTSE 100 Index falls by more than 50%. This plan is available as an ISA and also accepts ISA transfers and non-ISA investments.

Risk versus reward

It is important to remember that unlike deposit based savings products, this plan puts your capital at risk and if the FTSE does fall more than 50%, you could lose some or all of your initial capital. Also, since it is an investment rather than a deposit-based plan, your initial capital is not covered by the Financial Services Compensation Scheme for default.

In conclusion …

Whatever route you decide to take, there is no escaping the impact of continuing record low savings rates and falling income levels, all to be compounded by the prospect of sharp rises to inflation and the uncertainty that may come with our exit from the European Union. It seems the trade off for capital security for some time to come will be low rates of interest and in all likelihood a negative return in real terms, whilst for those considering using some of their savings to invest, 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 for more information on the Investec Enhanced Income Plan »

Click here to visit our Income 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. Fair Investment Company does not offer advice and any investment transacted through us in on a non-advised basis. 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 Investec Enhanced Income Plan is a structured investment plan which 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 or any shares listed within the Index is not a guide to their future performance. This investment does not include the same security of capital which is afforded to a deposit account.    

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.

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Fixed returns – our round up of the latest fixed rate options

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Last updated: 30/08/2016

For those who want to know exactly how much they will receive, when and for how long, the traditional deposit-based fixed rate bond has long been one of the safest and most popular choices for many. But with interest rates on savings remaining at record lows, and with the possibility of this getting even or fixed worse as we get to grips with the post-Brexit environment, many more are starting to consider the wider range of products offering a fixed return. So whether it is the more traditional fixed rate bond rate Cash ISA, or you are looking to put your capital at risk in return for a higher fixed income, we take a look at a number of options as well as give you a round-up of the latest offerings.

Short term: up to 2 years

Fixed rate bonds

For those looking at the shortest fixed terms, Habib Bank Zurich offer a 6 Month Fixed Rate Deposit paying 0.80% AER, whilst they also offer a higher rate of 1.10% AER if you can tie your money up for a year, with their 12 Month Fixed Rate Deposit. Both products have a relatively low minimum of £1,000 and your deposit is eligible for the Financial Services Compensation Scheme (FSCS). Interest is paid at maturity and as is standard with most fixed term deposits, no withdrawals are permitted during the term of the bond.

Bank of Cyprus UK offer a top rate of 1.40% AER if you fix for 2 years, although they have a slightly higher minimum of £10,000 whereas Habib Bank will offer 1.35% AER with their 24 Month Fixed Rate Deposit but with a lower minimum of £1,000. Both pay interest at maturity and eligible deposits are covered by the UK FSCS.

Fixed rate Cash ISA

Bank of Cyprus UK offer a 2 Year Fixed Rate Cash ISA paying 1.20% AER, and only marginally higher at 1.30% AER if your fix for 3 years, both with a low minimum deposit of just £500. These accounts are available to anyone aged 16 or over and interest is paid annually. ISA transfers are permitted and eligible deposits are covered by the UK FSCS.

Medium term: 3 to 4 years

Fixed rate bonds

In the three to four year space, our top deal comes again from Bank of Cyprus UK with their 3 Year Fixed Rate paying 1.50% AER. The minimum deposit is £10,000 and interest is paid on maturity. For those looking for a lower minimum or more frequent payment of interest, AXIS Bank UK’s 3 Year Fixed Term Deposit also pays 1.50% AER but with a £1,000 minimum (£200,000 maximum) and offers monthly, quarterly, annually or at maturity interest options. No withdrawals are permitted from either account.

Fixed rate Cash ISA

Bank of Cyprus remain very competitive in the fixed rate Cash ISA market with their 3 Year Fixed Rate Cash ISA currently paying 1.30% AER and with a respectable minimum deposit of just £500. This account also allows you to transfer in existing ISAs from other providers.

Longer term: 5 years +

Fixed rate bonds

Although you are still rewarded with higher savings rates in return for locking your money away for longer, the interest rate gap between short term and longer term is also at record lows. For those prepared to commit their savings for five years, Vanquis Bank’s 5 Year Fixed Rate Bond is paying 2.20% AER. The minimum deposit is £1,000 and interest can be paid monthly or annually.

Savings rates at record lows…

Unfortunately the UK’s decision to leave the EU has had an impact on what were already record low interest rates on offer. Combined with the talk of the Bank of England potentially cutting the Bank Rate for the first time since 2009, and the outlook for many who rely on more traditional fixed term deposits is bleak to say the least.

To put this into context, 12 months ago we wrote about a 1 year fixed rate paying 1.90% AER, a 2 year paying 2.38% AER and a 3 year paying 2.50% AER . We are now looking at 1.25%, 1.60% and 1.65% AERs respectively. These are significant reductions of up to 34% on what were already historically low returns, with the biggest falls being felt at the longer term end of the market. This is why more and more are looking at a wider range of options, which inevitably leads one to consider investments.

Fixed income investments

The income from collective investments (such as funds) invariably comes from investing in a number of equities, bonds and commercial properties, which provide income in the form of dividends, interest and rental yields. Combined with the fluctuation in value of the underlying asset, be this a share, bond or property, then by its very nature the value is neither fixed nor guaranteed, and so such investments normally only offer a variable income.

Fixed income, fixed term

Investors have therefore always struggled to find an investment that actually pays a fixed income, which perhaps partly helps to explain why the Enhanced Income Plan from Investec has been our most popular income investment. The plan offers a fixed income, which is paid to you regardless of the performance of the stock market, whilst the investment also has a fixed term, so you know exactly how much you will be paid and for how long. The current issue offers 5.04% fixed income each year, which is paid as 0.42% each month.

This investment includes conditional capital protection which means that your initial capital is retuned in full unless the FTSE 100 Index falls by more than 50% during the plan term. If it does, and also finishes the fixed term lower than its value at the start of the plan, your initial investment will be reduced by 1% for every 1% fall, so you could lose some or all of your initial investment.

The Enhanced Income Plan is also available as an ISA and accepts ISA transfers with a minimum investment of £3,000.

Cash versus investment

The most important difference between the fixed rate bond and the fixed income investment is that with the former, your capital is treated as a deposit and is therefore protected and returned to you at the end of the term, subject to the bank in question remaining solvent. An investment into the Enhanced Income Plan is used to purchase securities issued by Investec Bank plc, which means the bank’s ability to meet and repay their financial obligations is equally an important consideration. However, as highlighted above the return of your capital is also dependent on the performance of the FTSE 100 Index, therefore your capital is not protected and is at risk.

Peer to Peer

One particular area where we have seen a significant rise in the number of the offerings is Peer to Peer lending, some of which offer fixed rates of interest. In simple terms, peer to peer lenders match people who want to earn interest on their money with people who want to borrow money. This means that both lenders and borrowers can benefit from interest rates that are better than those found on the high street, whether from conventional fixed rate accounts or from bank loans.

Fixed interest

One of the earliest and perhaps best known Peer to Peer lenders offering fixed interest is Wellesley & Co. Here your investment is combined with funds from other investors and then lent out to individuals and businesses investing in property – so every loan is secured against tangible assets such as residential or commercial property. They then use the interest paid by them to pay competitive rates to investors. Wellesley have lent out over £336m to date.

The current rates (based on receiving monthly interest) are 2.95%, 3.30% and 3.70% over 1, 2 and 3 years respectively. You also have the option to receive interest at maturity, offering up to 3.75% annual interest. Compared to deposit-based fixed rate bonds these headline rates are attractive however these are capital at risk investments, and so you could lose some or all of your initial investment and interest payments are no guaranteed if the borrower fails to repay the loan. Peer to Peer lending is also not covered by the Financial Services Compensation Scheme.

Risk v reward

The principle of risk versus reward means that the search for higher fixed returns 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 timeframe and then consider whether you are prepared to accept the level of risk to your capital in return for the higher fixed rate.

Our best three and five year fixed rates are currently offering 1.85% and 2.20% respectively. By accepting risk to your capital, Wellesley would offer fixed interest of 3.70% over three years whilst the Investec plan offers 5.04% over six years, thereby doubling your fixed return over three year and increasing it by 2.84% a year over the longer term. Once you have understood how each plan works, the decision then is whether you are comfortable with putting your capital at risk in return for the higher fixed returns on offer.

 

Compare fixed rate bonds »

Compare fixed rate Cash ISAs »

Compare Peer to Peer investments »

Find out more about the Investec Enhanced 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. Always remember to check whether any charges apply before transferring an ISA.

The Investec Enhanced Income Plan is a structured investment plan which 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 or any shares listed within the Index is not a guide to their future performance.

Peer to peer savings accounts are not the same as normal savings accounts so you need to consider the features before you invest. Investment through Wellesley & Co involves lending to individuals or companies and therefore your capital is at risk and interest payments are not guaranteed if the borrower fails to repay the loan. In that event, Wellesley Finance would attempt to recover the funds outstanding. However, such security arrangements do not guarantee full return of capital and income. Peer-to-Peer lending is not covered by the Financial Services Compensation Scheme.

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Fixed rate head to head: Cash versus Investments

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The appeal of a fixed return from our capital is obvious, which is why the fixed rate bond has been such a popular choice over the years with both savers and income seekers alike. But whilst savings rates continue at their record lows, it is also understandable why some are choosing to consider moving up the risk spectrum in the hunt for higher returns. Although investments generally only offer a variable income, our most popular investment plan offers a fixed income, and so the ability to compare the two options becomes easier. Here we offer a fixed rate head to head, as we compare the pros and cons of our best selling income investment with the top fixed rate bond deals available.

Fixed rate bonds

Fixed rate bonds, or more accurately fixed term deposits, have for some time been a cornerstone of many a saver’s portfolio. Probably the main reason is that they offer a fixed rate of interest, known at outset and which does not change for the duration of the product, so you know exactly how much you will receive and when.

These products also combine a fixed term, so you know exactly how long you will receive the level of fixed income, and provided the bank remains solvent, your capital is protected and returned to you in full at the end of the fixed term. The longer the fixed term, normally the higher the fixed rate of interest offered, as compensation for tying up your money.

Fixed income investments

The income from collective investments (such as funds) invariably comes from equity dividends, bond interest or rental yields from property. Combined with the fluctuation in value of the underlying asset, be this a share, bond or property, then by its very nature the value is neither fixed nor guaranteed and so investments normally offer a variable income – and of course your capital is at risk.

Fixed income investments therefore are not common, which perhaps partly helps to explain why the Enhanced Income Plan from Investec has been our most popular income plan. The plan offers a fixed income and means that you receive your income regardless of the performance of the stock market, so the investor has the certainty of knowing at the outset exactly how much he will receive each and every year.

Cash v investment

The most important difference between the two is that with a fixed term deposit, your capital is treated as a deposit and is therefore protected and returned to you at the end of the term, subject to the bank remaining solvent. However, whilst Investec’s fixed income investment also relies on the bank remaining solvent throughout the term of your investment, the return of your capital is also dependent on the performance of the FTSE 100 Index, therefore your capital is at risk.

Whilst income remains a top priority for many and the appeal of fixed rate remains as high as ever, having a good understanding of the main differences between these two fixed rate options is often not fully explored, so here we compare the key features of each of them:

Fixed rate

The current market leading long term fixed rate bond is the 5 Year Fixed Rate Deposit Account from State Bank of India, which offers 2.50% AER fixed. By historical standards this is one of the lowest on record. The latest issue of the Enhanced Income Plan offers an annual income of 5.04%, which is more than double that offered by the best cash-based fixed rate available.

Payment frequency

Another important feature of fixed rate products is how often the interest is paid. State Bank of India’s fixed rate only pays interest annually, and when you set up your account, an instant access savings account is automatically opened and the interest is paid into this account on an annual basis, so there is also no option to compound your interest either. This is not particularly attractive for those looking to supplement their income with a regular fixed rate payment, or who would like the option to have the interest paid into another account.

The Enhanced Income Plan pays income monthly (0.42% per month), which can often be the most useful in terms of budgeting and is attractive when looking to supplement existing income or boost retirement income from your capital. A monthly option for cash savers is available from Aldermore Bank’s 5 Year Fixed Rate Account which also includes the option for this to be paid into an account of your choice, but the rate is 0.25% lower than the State Bank of India product at 2.25% AER fixed.

Fixed term

Both the fixed term deposit and the Enhanced Income Plan have fixed terms. Historically, five year fixed rates have been the most common long term fixed rate and have offered the higher rates of interest in return for tying your money up a longer period. The Enhanced Income Plan also has a fixed term but this is one year longer at six years. Fixed terms often appeal to those who wish to plan around this and combined with a fixed rate, offer the peace of mind of knowing exactly what will be paid, when and for how long.

Early closure

Premature withdrawals, additional deposits or early closures are not permitted during the term of the State Bank of India fixed term deposit. The Enhanced Income Plan does include the option to withdraw your money early, however the investment is designed to be held for the full term and early withdrawal or closure could result in you getting back more or less than you originally invested, depending on how long your investment has been running and market conditions at the time

ISA option

State Bank of India’s 5 Year Fixed Term Deposit is a non-ISA fixed rate and so is not available as a Cash ISA whilst the Investec plan is available as both an ISA and non-ISA, whilst it also accepts ISA transfers. If you are someone who would otherwise pay basic rate income tax on some or all of the interest received from their capital, by using your ISA allowance you could be up to 20% better off, with greater tax savings for higher rate tax payers.

Market leading five year fixed rate Cash ISAs are only offering 2.0% AER, and so by comparison, the Investec plan offers an even higher increase to your fixed income in return for putting your capital at risk.

Treatment of capital

Since the income from both of these products is fixed for the term of the plan, their main difference is the treatment of your initial capital. The fixed term deposit is capital protected, which means that your initial capital is returned in full at the end of the fixed term (subject to credit risk which is covered below), whilst the Enhanced Income Plan puts your initial capital at risk.

Unlike most income investments, the Enhanced Income Plan does include some capital protection from a falling stock market. This is commonly known as conditional capital protection and means that the return of your initial capital is conditional on the performance of the FTSE 100 Index and will be returned in full at the end of the six year term, provided the FTSE does not fall by more than 50%. If it does fall below 50%, and also finishes the fixed term lower than its value at the start of the plan, your initial investment will be reduced by 1% for every 1% fall, so you could lose some or all of your initial investment.

Credit risk

Repayment of your capital at the end of a fixed term deposit is reliant on the bank being solvent at the time the capital repayment becomes due, whilst an investment into the Enhanced Income Plan is used to purchase securities issued by Investec Bank plc, which means its ability to meet and repay their financial obligations is equally an important consideration. Both of these products therefore contain counterparty credit risk, which means that in the event of the bank going into liquidation, you could lose any future returns as well as some or all of your initial capital.

Credit ratings and agencies

One accepted method of determining credit worthiness of a company is to look at credit ratings that are issued and regularly reviewed by independent companies known as ratings agencies. Fitch is a leading credit agency and as at 1st May 2016, Investec Bank has a BBB rating and the State Bank of India has a BBB- rating, both with a stable outlook. The ‘BBB’ rating signifies both institutions are considered to have a good credit quality with low expectation of failure to repay its debts whilst the ‘-‘ denotes being at the lower end of this particular rating grade. A stable outlook indicates the rating is not likely to change in the short to medium term (around 6 months to 2 years).

Compensation scheme

Provided the deposit taker offering the fixed rate bond has a UK banking licence, your initial capital is normally eligible to be covered by the Financial Services Compensation Scheme which covers potential deposit claims up to a maximum of £75,000 per person, per institution. The Enhanced Income Plan is not a deposit so it would not be covered by the Financial Services Compensation Scheme for default alone.

Risk v reward

The principle of risk v reward means that the search for higher income returns often leads us to consider putting our capital at risk. A good benchmark for assessing Investec’s fixed income investment is to compare the best fixed term deposit rates on offer over a similar timeframe, and then consider whether you are comfortable with the risk to your capital in order to receive a higher fixed return. As detailed above, by accepting risk to your capital the Investec plan offers just over double the market leading fixed term deposit, with a higher increase when compared with leading fixed rate Cash ISAs. The risk is that is if the FTSE falls by more than 50%, you could lose some or all of your initial investment.

Fair Investment conclusion

Whatever fixed rate option is undertaken, it is imperative that the risks of each are fully considered and understood. Whether this is inflation risk, risk of capital loss or credit risk, it should always be remembered that it is the income and capital loss/rise combined that produce your overall return.

Commenting on the cash versus investment fixed rate options, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company, said: “Whilst fixed term deposits offer the peace of mind of a safe return of our initial capital, we cannot also escape the fact that the current rates on offer are some of the lowest on record. But when making a comparison between a cash product and an investment, we must always bear in mind that one offers capital protection, whilst the other puts your capital at risk.”

He continued, “With fixed deposit rates as they are, the pressure is clearly on savers to think long and hard about what to do with their money, and yet whilst the high level of fixed income and the monthly payment frequency are attractive features of the fixed income investment, before considering any investment it is important to understand the balance of risk v reward. The decision is therefore whether you are comfortable with putting your capital at risk combined with the terms of the conditional capital protection offered, in return for the higher fixed returns.”

 

The Investec Enhanced Income Plan is now available for ISAs, ISA transfers and non-ISA investments, with a minimum investment of £3,000. Click here to find out more »

The State Bank of India 5 Year Fixed Term Deposit is now available as a deposit only (non-ISA), with a minimum deposit of £10,000. Click here to find out more »

 

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. Fair Investment Company does not offer advice and any investment transacted through us in on a non-advised basis. 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 Investec Enhanced Income Plan is a structured investment plan which 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 or any shares listed within the Index is not a guide to their future performance.

Tax treatment 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.

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Investor’s Guide to Income

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Last updated: 15/02/2016

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 more important than ever. So what better place to start 2016 than with our Investor’s Guide to Income where we give you an overview of the 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 still appear to be with us for some time to come and there remains a significant question mark around what might happen to inflation in the coming years. Whilst annuity rates also remain comparatively low and many salaries are only just starting to keep up with the real cost of living, it is understandable why income remains a top priority, regardless of our stage in life.

Trends from the last couple of years show that there have been record numbers of ISA savers using the investment element of the New ISA allowance, revealing that many are looking to take on more risk than before in an attempt to try and produce the levels of income previously enjoyed. So as 2016 gets underway, this brief investor’s guide to income is the start of the income and ISA themes that we will develop throughout the year as the demand for innovative income investments continues and ISA savings take on an increasingly important role. So what are the main areas for consideration?

Open ended or fixed term?

Open ended

Most investors who have had income investments in the past are likely to have at least considered an open ended investment fund. Here, your investment is pooled together with those from other investors which combined make up a single fund. Your investment buys units in that fund at the prevailing price, which is normally priced daily based on the value of the underlying holdings. The majority of income funds are actively managed, which means that an investment manager, often supported by a team of analysts, researches companies and then invests accordingly, moving in and out of companies in line with fund’s investment objective and depending on their view of where income, and perhaps growth, can be achieved.

Since there is an ongoing management of the fund, there is normally an annual fund management charge along with additional charges for the platform and/or service within which you hold the fund. Open ended funds, as the name suggests, are designed to carry on regardless of whether new investors buy in, or existing investors sell their investment. The investor is therefore in control of when they buy the units in the fund, as well as when they decide to sell them, the price of which can go up and down on a daily basis depending on where the fund is invested and the performance of those assets.

Fixed term

Fixed term investments on the other hand last for a defined term, known at outset, and is normally around five or six years. Although most of these investment plans offer a daily secondary market price, which can be higher or lower than the price at the start the plan (and in this respect not dissimilar to investment funds), these investments are designed to be held for the full term. The fixed term may appeal to those who wish to plan around this and it also removes what can often be the difficult decision of when to sell or switch your existing investments.

Fixed income versus variable income

Investment funds

Income funds can be broadly split between two types, both of which offer variable income which means it can go down as well as up. Firstly, those funds which invest in companies (shares) and use dividends to provide income, for example funds in the UK Equity Income sector. One such fund and one which now has over 12 months trading history behind it, is the first fund offered by Neil Woodford’s new venture, the CF Woodford Equity Income fund, which targets a 4% income yield each year and pays quarterly.

The second type is those funds which use corporate bonds and/or gilts to provide income, such as Royal London’s Corporate Bond fund. This fund is Silver rated by Morningstar OBSR and has a current distribution yield* of 4.42% with quarterly income payments. Since the market value of both types of funds can fall as well as rise over time, so can the value of your units and since the fund manager will buy and sell different company shares or bonds depending on their view of the market, so too will your income vary.

Investment plans

Investment plans on the other hand can offer either variable income or fixed income. They differ from investment funds since they offer a defined return for a defined level of risk, known at the outset and prior to investing. One popular example of a variable income is the FTSE Contingent Income Plan from Focus (Credit Suisse acting as the counterparty), which offers up to 7.0% each year with a 1.75% income payment made at the end of each quarter provided the FTSE 100 Index closes at or above 75% of its value at the start of the plan (i.e. it can fall up to 25% and you would still receive an income payment). If it closes below this level, no income will be paid for that quarter. Capital is at risk if the FTSE falls by more than 40%.

With fixed income investment plans you know exactly what you will be paid, when and for how long, which has its obvious appeal for those looking to plan for the future and are seeking a regular and defined income. The Enhanced Income Plan from Investec has been our most popular income investment over the last few years with the current issue paying 5.28% annual income, regardless of what happens to the stock market. Since most yields on income investments are variable, this type of plan offers a unique and potentially attractive income alternative in the current climate. Capital is at risk if the FTSE falls by more than 50%.

Monthly or quarterly payments?

Another important feature of income investments is how often income is paid out. The most common payment frequencies are bi-annually, quarterly and monthly, with the more regular frequencies usually being the most popular with investors. These investments therefore provide a regular opportunity to receive an income, although different investment funds have different payment frequencies with many bond funds offering monthly income, whilst equity funds normally pay quarterly and, more rarely, twice yearly.

Investment plans normally offer monthly or quarterly payments. The Enhanced Income Plan mentioned above offers a fixed payment each month, currently at 0.44% of your initial investment, and since monthly income can be the most useful in terms of budgeting and when looking to supplement existing income, this payment frequency is often the most sought after. The FTSE Contingent Income Plan offers a potential income each quarter.

Conditional capital protection versus diversification

Conditional capital protection

Investment plans include what is known as conditional capital protection. This means that your initial capital is returned at the end of the investment term, as long as the underlying investment (for example, the FTSE 100 Index) has not fallen below a fixed percentage of its value at the start of the plan, normally 50%. This therefore offers some capital protection against a falling stock market. Your capital will be at risk if the underlying investment does fall below the defined level, in which case your initial capital will be reduced by 1% for each 1% fall, so there is the chance you could lose some or all of your initial investment.

Diversification

Your capital in an investment fund is at risk based on the value of the underlying holdings, which can go up or down on a daily basis. As such, there is no capital protection offered, nor is there the conditional capital protection associated with fixed term investment plans. However, since most funds invest in multiple holdings (equity funds between 30 and 90, bond funds often over 100), the impact of one of the underlying holdings falling significantly in value is reduced – this is commonly known as diversification. Investment funds also have the opportunity for capital growth should the value of the underlying investment rise in value, a feature which is not usually available within income investment plans.

Counterparty risk

Unlike a fund, fixed term investment plans use your investment to purchase securities issued by the counterparty (usually a retail or private bank), which means that their ability to meet their financial obligations becomes an important investment consideration. This is known as counterparty or credit risk and means that in the event of the bank’s insolvency, you could lose some or all of your initial capital as well as any rights to future income, and these investments are not covered by the Financial Services Compensation Scheme for default alone. There are various global credit rating agencies which assist in determining the potential credit worthiness of these institutions.

Risk versus reward

When considering income investment options it is important to understand the principle of risk versus reward, which means that the opportunity to receive a higher income than might be available from cash deposits inevitably requires the investor to put their capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe (for example, five years) and then consider whether you are comfortable with the additional risk you are taking in order to receive either a high fixed return or the potential for a higher variable income.

Leading five year fixed rates are currently offering around 3% and so by accepting risk to your capital, the potential income over and above this (along with the potential for capital growth where relevant), allows the income investor to decide whether they are comfortable with putting their capital at risk in return for the yields on offer. Any conditional capital protection should also be a consideration, as should the potential to protect your income from the effects of inflation over time.

Use your New ISA allowance for tax free income

By contrast to the interest rate environment, the prominence of ISAs has moved forward considerably since the significant increase to the annual ISA allowance was introduced in July 2014. The current allowance is now £15,240 and since the distinction between Cash ISAs and Investment ISAs (or Stocks & Shares ISAs) has been removed, you can now place up to the full allowance in one or a mixture of both, and you can also transfer from one to the other without restriction. It is therefore up to you to decide how much of your ISA portfolio is put into cash and investments.

One of the main benefits of an ISA is that income is received tax free and with no further tax to pay. This is particularly attractive for income that would normally be subject to income tax (for example, interest from deposit based savings, most investment plans and income from bond funds) where the impact of tax can be significant, especially over time. With the lowest marginal rate of income tax currently standing at 20%, this is a sizeable reduction to any stated returns on offer. Remember that tax treatment of ISAs depends on your individual circumstances and may be subject to change in the future.

Fair Investment conclusion

Commenting on the range of income investments available, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith, said: “Investment funds have traditionally been the more popular choice for income investors with varying investment objectives and a wide range of underlying investment styles and sectors to choose from. These also bring with them diversification benefits of spreading your investment across a number of different companies or bonds, as well as the potential for capital growth in addition to a regular income stream.”

He continued: “As an alternative to open ended investment funds, the defined return and defined risk offered by fixed term investments offer investors a different approach to achieving income. Their conditional capital protection also means that your initial investment has some protection against a falling market. Combined with either a fixed or variable income and these plans can offer a competitive balance of risk versus reward.

In conclusion, whichever route your choose, the market for income investments can be full of attractive headline yields but it is important to fully understand 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.”

Investment plans

We have a number of fixed term investment plans which offer either a fixed income or a variable income based on the performance of the underlying investment.

Click here to compare our current selection of income investment plans »

Fair Investment Fund Supermarket

With over 3,300 clean (non-commission) share class funds and access to over 200 fund groups, the Fair Investment Fund Supermarket offers a vast choice of income funds, many of which have 0% initial charge and low annual management charges, including low cost tracker funs, bond funds, UK equity income, global income and managed funds.

Click here to compare our current selection of income investment funds »

 

Click here for more information about the Investec Enhanced Income Plan »

Click here for more information about the Focus FTSE Contingent Income Plan »

Click here to compare UK Equity Income investment funds »

Click here to compare Bond Income investment funds »

 

* The distribution yield reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the Fund’s net asset value per share as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any initial charge and investors may be subject to tax on distributions.

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. Fair Investment Company does not offer advice and any investment transacted through us in on a non-advised basis. 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 may be subject to change in the future.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Past performance should not be taken as a guide to the future and there is no guarantee that these investments will make profits; losses may be made.

Structured investment plans 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 is not a guide to its future performance.

Savings Focus: RCI Bank’s market leading instant access and fixed rate selections

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RCI Bank is a relative newcomer to the UK, but is currently offering some of the best deals out there. We take a closer look at their story as well as reveal their market leading and award winning instant access account and their top fixed rate bond deals.

RCI Bank

The story behind RCI Bank is a unique one since it originated from the Renault Group, one of the world’s largest car companies. Developed as their own internal bank, RCI Banque was founded in 1974 and was created in order to meet the need to help customers finance their vehicles. Forty years later and the RCI Banque group is still privately owned by the Renault Group and operates in 37 countries across every continent, lending over €12 billion a year. RCI Bank launched in the UK in 2015 in conjunction with RCI Financial Services who combined have over 200 staff and lend over £2 billion each year.

Current selections

Despite only launching earlier this year, RCI Bank already has a compelling range of award-winning products. With a range covering a market leading instant access account and fixed term savings accounts up to two years, the focus is on relatively short term cash, which should appeal to anyone with half an eye on future interest rate rises.

Market leading instant access: offering 1.65% AER

The Freedom Savings Account is currently offering 1.65% AER variable gross, which is market leading for this type of account. This top rate is available to both new and existing customers and is free from notice periods, penalties, bonus periods, tiered rates and fees (although a £15 fee for CHAPS transfers applies). What you see is what you get, which perhaps also explains why it has been given a Moneyfacts rating of Outstanding*.

The account is available as a single or joint account and is free to use so you can make unlimited payments and withdrawals without charge. You have the option of interest being paid monthly or annually which will also compound provided you don’t move it to another account. There’s no limit or fees on the number of withdrawals you can make and it can be opened with a low minimum of just £100. You can apply online and RCI Bank state opening an account takes less than 15 minutes, whilst you also benefit from full UK customer support available 7 days a week

Click here to find out more about the RCI Bank instant access account »

 

RCI Bank short term fixed rate bonds: up to 2.35% AER

For those who are able to tie their money up for a fixed period and are also looking for a competitively priced fixed and regular rate of interest, RCI Bank also offers a duo of fixed rate savings accounts, over one and two years respectively. As you would expect, the rate of interest increases with the fixed term, the 1 year fixed term deposit offering 2.06% AER while the 2 year fixed term deposit is currently paying 2.35% AER. Both accounts have a Moneyfacts rating of Excellent*.

These fixed term deposits offer a guaranteed rate so you’ll know exactly how much you will earn by the end of the fixed term, whilst interest can be paid monthly or annually and can be compounded. Both deposits also give you the flexibility of unlimited top-ups for 30 days from your application however you cannot close your account once opened or make a withdrawal before the end of the term. You can apply online and the account has a low minimum of £1,000.

Click here for more info on the RCI Bank 1 Year Fixed Term Savings Account »

Click here for more info on the RCI Bank 2 Year Fixed Term Savings Account »

 

Deposit Guarantee Scheme

Deposits held with RCI Bank are not covered by the UK Financial Services Compensation Scheme but instead fall within the scope of the French deposit protection scheme, known as the FGDR or Fonds de Garantie Dépôts et de Résolution. Eligible deposits with RCI Bank are protected, and all of the accounts above are covered by the FGDR, protecting the first €100,000 per customer within the RCI Banque group. As with the FSCS, the protection covers each customer rather than each account and for joint customers, each customer is protected up to €100,000 (so up to €200,000 between them). Since the maximum eligible is based in Euros, the UK sterling equivalent at any given time will depend on the exchange rate between the British Pound and the Euro.

Further information – FDGR

Created by law, the FGDR compensates depositors for an amount up to €100,000 per person, per institution, when a banking institution fails. This guarantee benefits all bank customers, private individuals, businesses of any size and associations. For more information and to check their status, visit www.garantiedesdepots.fr/en.

* Moneyfacts awards valid as at 01.10.2015

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Investment Focus: Investec’s Enhanced Income Plan

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Last updated: 10/11/2015

By combining a high level of regular fixed income with some capital protection against a falling stock market, the Enhanced Income Plan from Investec Bank sits somewhere between a fixed rate bond and directly holding a dividend yielding share. As the demand for income, whether fixed or variable, remains high on the agenda for both savers and investors, we take a look at what makes this one of our best-selling income investments.

The best just got better

The Enhanced Income Plan is a relatively straightforward plan to understand. It pays a fixed rate of income, every month, for a fixed term, with your money back at the end of the term unless the FTSE 100 Index falls more than 50% below its value at the start of the plan. The current version offers investors a fixed income of 5.28% each year, which is the highest rate we have seen for nearly a year.

What is driving customers?

This is our best-selling income investment plan. Whether you are working and need to supplement your earnings, or retired and looking at options for your pension or ways to add to your pension income, the need for income is one of the most common demands put on our capital. Traditional income solutions often focus on fixed rate bonds at the capital protected end of the risk spectrum, to yield targeting investment funds or shares at the fully capital at risk end. This investment combines some of the most popular elements of the two.

Invest in the FTSE now?

Apart from a few blips, most recently in recent months, investing in the stock market over the last couple of years will have mostly been a rewarding experience, culminating in the FTSE breaking through the 7,000 barrier for the first time in history. And yet despite the attractive dividend yields we have seen from a number of our largest companies, whilst the FTSE 100 Index remains volatile and at record high levels, there are many investors who remain uncertain about the level of income that might be enjoyed in the coming years. Remember, it is the income and any capital loss/rise combined that contribute to your overall return.

Where have all the fixed rates gone?

In contrast to the growth of the FTSE, savings rates are still at record lows and with no realistic prospect of any sudden sharp increases let alone a return to the rates of yester-year and those heady days of 5% plus interest rates, whatever your situation the ability to meet income needs remains a very real challenge. But against this backdrop of intense pressure on savers, and whilst stock market conditions perhaps raise more questions than they do answers, this investment from Investec has remained a top seller with income seekers. So let’s take a look at its main features…

Fixed income

With savings rates at such low levels, the prospect of a high fixed income is an attractive one. Unusual for an investment which normally pay a variable income dependent on the performance of the underlying asset, this plan pays a fixed income regardless of the performance of the stock market. The current issue of the plan is paying 5.28% p.a. fixed, which means that the investor has the certainty of knowing at the outset exactly how much they will receive each and every year.

Monthly payments

Another popular feature is the monthly payment frequency since this is the most useful in terms of budgeting, especially when many UK equity income funds only offer twice yearly or quarterly payments. Therefore, not only does the investment provide a high level of fixed income, but it also pays this on a monthly basis, which could be an important feature when looking to supplement existing income. At 5.28% on offer from the current version, this equates to 0.44% paid each and every month for the entire term of the plan.

Fixed term

The Enhanced Income Plan has a six year fixed term and although you do have the option to withdraw your money early (and in this respect is not dissimilar to investment funds), the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested.

Many savers will be used to a fixed term whilst this feature should also appeal to those who wish to plan around this accordingly. Combined with a fixed and regular level of income, this also means that full plan terms are known at the outset and so investors can consider more clearly the risk versus reward prior to investing their capital.

Conditional capital protection

When considering investment options it is also very important to understand the balance of risk versus reward. Inevitably, the opportunity to receive higher returns than might be available from cash deposits requires the investor to put their capital at risk.

The Enhanced Income Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional on the FTSE not falling by more than 50% of its starting value. If the FTSE stays within this 50% barrier throughout your investment then you will receive a full return of your original investment but if it falls below, and also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE. Therefore your capital is at risk and you could lose some or all of your initial investment.

Credit ratings and agencies

Unlike a fund, your investment is used to purchase securities issued by Investec Bank plc and so their ability to meet financial obligations becomes an important consideration. Fitch is one of main global credit rating agencies and awarded a credit rating of BBB- with a stable outlook (awarded 22nd January 2014).

The ‘BBB’ rating denotes an adequate capacity for payment of financial commitments although adverse business or economic conditions are more likely to impair this capacity with the ‘-‘ signifying it is at the lower end of this rating grade. The stable outlook indicates that the rating is not likely to change in the short to medium term, i.e. in the next 6 months to 2 years.

Investec Bank plc

Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, as at April 2015 they look after £124.1 billion of customer assets, employing around 8,200 people. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their UK banking operation, Investec Bank plc, looks after £10.3 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.

Risk v reward

The principle of risk versus reward means that the search for potentially higher returns leads to the need to put your capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe and then consider whether you are comfortable with the risk to capital you are taking in order to receive the opportunity for a higher return.

Leading five year fixed rates are currently offering around 3.10%, and so by accepting risk to your capital, you are increasing your fixed return by around 2.18% a year (since the fixed income from this investment is 5.28%). With the market failing to meet the need for higher income, the decision is whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in order to achieve the potential for a higher return.

Fair Investment conclusion

Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “One of the main attractions with the Enhanced Income Plan is the ability for potential investors to consider its risk versus reward prior to investing. The plan pays a fixed income, each month, for a fixed term – so you know exactly what you will receive, when, and for how long – whilst you get your capital back at the end of the term unless the FTSE has fallen by more than 50%.“

He continued: “Compared to other income investments, this defined return for a defined level of risk could be attractive whilst the monthly income and fixed income features are often high up on the list of priorities for income seekers.”

 

Click for more information about the Investec Enhanced 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 depends on your individual circumstances and may change.

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.