Last updated: 08/11/2016
There’s no denying that the outlook for traditional Cash ISAs at the moment is bleak. Not only are savings rates at rock bottom, but banks don’t really want the additional cost of having to run the Cash ISA tax wrapper that goes with it – most high street banks simply do not want your Cash ISA money – and therefore for those that do, they only need to offer a low rate of interest to get it. For those looking for alternatives, this new launch Cash ISA from Investec Bank plc offers an interesting way to receive tax efficient withdrawals each year, combined with the potential to receive back an amount equal to your initial deposit at the end of the fixed term. Here we take a closer look to see how it stacks up.
Traditional Cash ISAs offering low returns
The banking and economic environment continue to create challenges for savers, brought about in the main by the impact of record low interest rates on our savings and our future. The current market for traditional Cash ISAs still offers some of the lowest rates ever seen. In fact, you are hard pushed to get much over 1.50% in return for tying up your money for five years, which is why many looking for a fixed rate are considering shorter term options.
Currently our most popular deals come from Aldermore Bank, paying 0.95% AER, 1.15% AER and 1.20% AER on their 1, 2 and 3 year fixed rates respectively. You can save from £1,000 and can transfer existing ISAs. Our leading instant access account is the AA Cash ISA Easy Access, paying 0.75% AER variable.
Cash ISA alternative – potential for higher returns
By linking the amount of capital that is returned to you at the end of the plan to the FTSE 100 Index, this structured deposit plan offers the potential for higher returns than those that are available from more traditional products such as fixed rate Cash ISAs. So the upside is the potential for higher returns, whilst the downside is that since your return is linked to the performance of the UK stock market, unlike a fixed rate it is not guaranteed. This is the trade off for the opportunity to receive higher overall returns.
Fixed payments of 3.75% each year
The Investec FTSE 100 Retirement Deposit Plan has a fixed term of 6 years and pays a fixed payment of 3.75% each year, paid to you regardless of what happens to the FTSE 100 Index. Over the six year term this equates to 22.5%.
Capital returned at the end of the plan
The aim of the plan is to withdraw fixed annual payments from your initial deposit over 6 years, and repay the remainder of your initial deposit plus an additional return at maturity. The amount of capital returned at the end of the plan therefore, is either the remaining 77.5% of your initial deposit, or the remaining 77.5% plus an additional return of 22.5%.
This additional return is paid provided the FTSE 100 is higher than 90% of its level at the start of the plan, so the Index could have fallen up to 10% and you would still receive this additional return. If the FTSE has fallen by 10% or more, the amount returned to you will only equal the remaining amount of your initial deposit (i.e. no growth will be achieved).
Since the additional return on offer is dependent on the performance of the FTSE 100 Index, the defensive feature of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 10% and the fixed return of 22.5% is still paid.
The use of averaging
When calculating the final level of the FTSE 100 Index 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.
The 3.75% annual payment is well over double any fixed rate on offer from a traditional Cash ISA. However, it is important to remember that in the case of a traditional fixed rate Cash ISA, your initial deposit is always returned in full at the end of the fixed term. Although the annual payments from the Investec plan are fixed and paid each year, it is only if the additional return is paid at the end of the plan term would you be better off overall.
Since the plan is a structured deposit you will receive the remainder of your initial deposit back in full at the end of the six year term regardless of what happens to the FTSE 100 Index, and as long as the deposit taker for the plan, Investec Bank Plc, is able to repay your money. The bank’s ability to stay solvent and repay your capital is known as counterparty risk and is the same risk you take with any capital deposited with an institution with a UK banking licence.
In the event that Investec is unable to meet its liabilities, this deposit plan is eligible for Financial Services Compensation Scheme (FSCS) protection. Therefore, eligible depositors could be entitled to claim up to £75,000 per person.
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.
Cash ISA only
Please note that this plan is only available as a Cash ISA. The plan also accepts ISA transfers, from both Cash ISAs and Stocks & Shares ISAs and has a minimum deposit of £3,000 and the maximum deposit for a new current year ISA (2016/17) is the ISA limit of £15,240.
Fair Investment view
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “There’s no getting around the fact that the rates on offer from traditional Cash ISA savings products remain at record lows, and this looks set to continue. This is a real challenge for savers. By combining capital protection, fixed annual payments and the potential for an additional 22.5% return at maturity, this new launch from Investec offers an interesting alternative. The best long term fixed rate Cash ISAs are currently only offering a little over 1.50%, so if this plan pays the growth return at maturity, your overall return will be well over double these top deals.”
He continued: “Both are treated the same for FSCS purposes (up to the usual deposit scheme limits) but unlike the fixed rate Cash ISA, the maturity payment on the Investec plan is dependent on the FTSE and is not therefore guaranteed. So if you are prepared to sacrifice a guaranteed rate of interest, then the potential higher returns on offer could be appealing in the current economic climate.”
This plan is open now for new ISA deposits up to the £15,240 allowance for the current tax year (2016/17), as well as Cash ISA and Stocks & Shares ISA transfers. The minimum investment is £3,000.
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 or switching an ISA.
This is a structured deposit plan that is capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial capital and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial deposit 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.