Posts Tagged ‘income’

Inflation falls but what does this really mean for savers?

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Figures launched today reveal that UK inflation fell to 2.6% from its five year high of 2.9% the previous month. However, despite this fall, there is gathering consensus that it could rise again in the second half of this year. This latest level also means that inflation is still well above the 2% target set by the Bank of England, and so it remains as important as ever to review your options in light of the impact inflation can have on your hard earned cash.  We take a closer look at what the latest rate of inflation really means when making decisions around our savings and investments.

Inflation latest

UK inflation, as measured by the Consumer Price Index (CPI), dropped unexpectedly today to 2.6% according to the latest figures from the Office of National Statistics (ONS). This represents a fall of 0.3% from its previous five year high of 2.9% in the previous month – its highest level since April 2012. The rate has climbed gradually following a period of very low inflation during 2015. The latest figures provided by the CPI show there has been an increase of almost 2% over the last 12 months.

And yet despite this latest reduction, the forecast for inflation for the remainder of the year does not look bright either. Paul Hollingsworth, a UK economist at Capital Economics, explains that “it takes time for rises in producer prices to feed through to prices in the shops … we think that CPI inflation will rise a bit further in the second half of the year, peaking at about 3.2% in the fourth quarter.” Though Mr Hollingsworth accepts that inflation is likely to drop back down in 2018, the UK will feel the pinch in the second half of 2017.

The future for interest rates

In June the Bank of England predictably decided to keep interest rates at their record low of 0.25%. However, what was not so predictable was the fact that three Bank of England policymakers wanted to raise interest rates. In addition, Andy Haldane, Chief Economist and the Executive Director of Monetary Analysis and Statistics at the Bank of England, reportedly proposed that the Bank should increase rates “at a gradual pace and to a limited extent”. So although interest rates remain low, the deeper split with the Bank of England’s committee illustrates a potential rise in the near future and perhaps sooner than you might think. Whether the latest fall to the headline rate of inflation will dampen this sentiment we will have to wait and see.

Pressures mounting on households

Though, for right now, the status quo remains the same. The lowest interest rate on record coupled with relatively high levels of inflation when taking a five year view, is a combination which will make life difficult for the average UK household. Despite recent reports from the ONS that unemployment fell, wage growth is slipping to 1.8 per cent. Weak wage growth and high inflation rates means less disposable income for households, making it harder for the average UK household to make ends meet, let alone put enough money into their savings.

Impact on saving

Higher headline rates of inflation are always bad news for savers as the value of the money they hold in their accounts is eroded more quickly. The knock-on effect of higher inflation is that savings accounts will not pay enough interest to beat inflation, and this is already the case.

Whatever happens to future interest rates, with inflation currently running at 2.6%, basic rate taxpayers with the full Personal Savings Allowance available need to achieve at least this rate to match inflation, whilst taxpayers without the Personal Savings Allowance need to achieve at least 3.25% and higher rate taxpayers considerably more. A review of the savings rates we currently have on offer shows rates of around 1.25% AER on instant access, 1.70% AER and 1.90% AER for one and two year fixed rates respectively, around 2.20% AER for a three year fixed rate and 2.42% AER if you fix for five years.

This means there are no cash savings products currently on offer that get anywhere close to the rate of inflation, ensuring that with deposit based savings, you are losing money in real terms.

Always compare

Regardless of what inflationary pressure there is, the best course of action is to check the amount of interest paid on all of your savings and then take the time to compare your current savings accounts with what is currently available in the market. Even though savings rates do not currently stack up against inflation, if you want to maintain full capital protection with your money there are limited alternative options out there. But making sure the cash deals you do have are competitive has to be priority number one.

Lose money in real terms versus taking on more risk

The risk of doing nothing is that your money is losing value in real terms for the entire time that the interest rate paid is less than inflation. Due to the amount that savers have to earn to match inflation, it may be time for a change of strategy in relation to your savings. But whilst the combination of low savings rates and the potential for continuing 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 cash based products.

Beating inflation by putting your capital at risk

By putting your capital at risk you open up opportunities for potentially higher returns which in turn could combat any future rises to inflation. Although most investments only offer a variable income, the fixed monthly income available from Investec’s FTSE 100 Enhanced Income Plan has been a very popular choice with our investors. The current issue pays 0.3625% per month (equivalent to 4.35% per year) and has a five year fixed term. This plan is available as an ISA and also accepts ISA transfers and non-ISA investments. 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 40%.

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 40%, 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 should the bank default.

In conclusion …

Whatever route you decide to take, there is no escaping the impact of continuing low savings rates and falling income levels, all to be compounded by the prospect of inflation continuing well above the level of interest paid on savings accounts. 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.

 

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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 is 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.

2017 ISA season selections – our Top 5 Investment ISAs

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With only a few weeks to go before the end of the tax year, time is running out to maximise the tax benefits of your ISA allowance before the deadline on 5th April 2017, otherwise it will be lost forever. This has already been another very busy ISA season, and whilst Cash ISA savings rates continue at their historical lows, it is perhaps not surprising that the trend in the increased use of the Stocks & Shares ISA that has taken place over the last couple of years, is still continuing. So to help you know where our other investors are putting their money this ISA season, we bring you our most popular Investment ISAs.

Our Top 5 Selections

Below we have listed some of our most popular Investment ISA plans, featuring both income and growth investments. With income continuing to play a critical role for many investors, the attraction of having tax free income is understandable. Whilst for investors looking for growth, the popularity of defensive investments is reflected in our selections, as the level of the stock market in recent years has led more and more investors to search for opportunities that offer investment level returns even if the market goes down slightly.

Your ISA allowance

The ISA allowance for the current tax year (2016/17) is £15,240, whilst all of the plans detailed below accept Cash ISA and Stocks & Shares ISA transfers. All of the plans also offer a Double ISA option, whereby you can invest the current tax year ISA allowance as well as next tax year’s ISA allowance (2017/18 ISA allowance is £20,000) via one application form – thereby offering the opportunity to invest up to £35,240 into new ISAs. Please check the individual plan for further details and for any application deadlines that apply.

 

Potential 10.65% annual growth

With the potential for double digit returns and the opportunity to mature early from year one onwards, the Investec FTSE 100 Enhanced Kick Out Plan has proved consistently popular with a wide range of investors and has been our best selling Investment ISA again this year. The plan will return 10.65% annual growth (not compounded) provided the value of the FTSE 100 Index at the end of each year is higher than its value at the start of the plan (subject to averaging). Your initial capital is at risk if the Index falls by more than 50% during the term, and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “On 1st March the FTSE closed at its highest level on record, but where will the market be in one year, or two year’s time? Depending on your view of what might happen to the FTSE 100, the ability to achieve 10.65% annual growth, even if the Index stays relatively flat, perhaps helps to explain why this plan has proved so popular. So if the combination of high growth returns, the ability to mature early, as well as some capital protection against a falling market sounds appealing, this might make for a compelling opportunity in the current investment climate.”

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Up to 8.20% annual income

The FTSE Contingent Income Plan from Meteor offers a quarterly payment of 2.05% during the plan if at the end of each quarter, the value of the FTSE 100 index has not fallen by more than 20% from its value at the start of the plan – that’s a potential 8.20% income each year. If the Index has fallen by more than this, no income would be paid for that quarter.

The plan has a maximum term of 10 years, but also offers the opportunity to receive your initial capital back in full before then – if the FTSE rises 5% or more at the end of each quarter (from year 2 onwards), you will receive your income payment for that quarter, along with a full return of your initial investment – this means your investment ends early. If the plan does not finish early, your initial investment is returned at the end of the plan provided the FTSE has not fallen by more than 40%, measured at the end of the fixed term only. If it has fallen below this level, capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “Those seeking income from their investments often put the potential yield and frequency of payments as their top priorities, so the headline yield of up to 8.20% is attractive and the cap on any income is balanced against the conditional capital protection on offer, thereby offering a competitive balance of risk versus reward. At 8.20%, the potential income from this latest issue is the highest currently available from this type of plan – and with a maximum term of 10 years, this investment offers a long term, high income opportunity.”

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5.04% fixed income each year

Our next plan is from Investec and is our best selling income investment this year, for both ISA and non-ISA investors. The current issue of the FTSE 100 Enhanced Income Plan pays a fixed income of 5.04% per year, with monthly payments of 0.42% paid to you regardless of the performance of FTSE.  Capital is at risk if the FTSE falls by more than 50% during the investment term. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall, so you could lose some or all of your original investment.

Fair Investment view: “The current issue of the Enhanced Income Plan is the first time since its launch that it has offered a five year fixed term (previously six years), whilst the plan continues to offer a fixed income, paid to you each month. Knowing exactly how much you will be paid, when and for how long are appealing features, and by offering a high fixed income rather than a variable income based on the performance of the stock market, this plans offers something different to income seekers.”

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34% return even if the FTSE falls up to 50%

Defensive plans offer investors a competitive return on their capital even if the stock market goes down slightly. With the FTSE maintaining historically high levels in recent years, these plans have risen in popularity and the FTSE 100 Defensive Growth Plan from Investec is no exception. The plan offers a fixed return of 34%, provided the FTSE 100 Index at the end of the term is at least half of its value at the start of the plan (subject to averaging). So the FTSE can fall up to 50% and you still receive a fixed growth return of 34%. If at the end of the plan the FTSE has fallen by more than 50%, no growth will be achieved and your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “If the FTSE had fallen up to 50% in 6 years time, and yet you still achieved 34% growth plus a return of your initial capital, would you consider that to be a good investment? Taking into account the performance of the FTSE in recent years, it is perhaps understandable why many investors are considering defensive investment plans. By offering the opportunity to return 5% compound annual growth provided the market does not fall more than 50%, this plan could be appealing for ISA investors who wish to take a defensive view of what might happen to the stock market in the medium term.”

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Potential 7% annual growth even if FTSE falls up to 35%

Following on with the theme of defensive investments, the newly launched FTSE 100 Defensive Step Down Kick Out Plan from Investec offers the opportunity for 7% for each year invested (not compounded), provided the FTSE 100 Index is above the required level at the end of each year. The required level is 100% of its starting value at the end of year 2, and then reducing each year thereafter down to 65% in the final year. So if the plan kicks out in the final year, you would receive 42% growth along with a full return of your initial investment.

If the FTSE is below the required level each year no growth return will be achieved, and at the end of the plan your original capital will be returned unless the FTSE 100 Index has fallen by more than 40% at the end of the term (subject to averaging). If it does, and also finishes at or below 65% of its starting value, your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “For those investors concerned about the historically high level of the FTSE and would therefore like to include a defensive element to their investment, this plan offers the opportunity for investment level returns not only if the FTSE goes up, but also if it stays flat or even falls by almost 35% in the coming years. By combining this with some capital protection should the stock market fall, this plan could offer a compelling balance of risk versus reward for those who are not confident that the FTSE will rise significantly in the medium term.”

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Important reminder – why do an ISA?

One of the main reasons for using an ISA is it’s tax treatment since no tax is payable on the income you receive, or any capital gains that you make, and there is also no need to declare any ISA income or capital gains on your tax return. They therefore provide tax efficient income and/or growth on your investment, the benefit of which can be compounded over time. See our Top 10 Tips for the 2017 ISA season for further help and tips on how to make the most from this important time of year. Please also note that with all of these investments, our experienced Investment Customer Services team is available on 0845 308 2525 to answer any questions you have.

How to apply

When you click for more information on any of the above plans you will be able to request a brochure pack which will be sent to you by post and email. This will include everything you need to invest, whether applying for an ISA, transferring existing Cash ISAs and/or Stocks & Shares ISAs or making on-ISA investments. Also note that these plans have different application deadlines, and may also close early so it is important to submit your application as soon as possible. Minimum investments and arrangement fees also apply.

Click here to compare more Investment ISAs »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular 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 legislation which are subject to change in the future. ISA transfer charges may also apply, please check with your provider before transferring an ISA.

These are structured investment plans which 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.

Investment Focus: Investec FTSE 100 Enhanced Income Plan

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Our Investment Focus articles are designed to give new and existing customers a more detailed overview of a selection of income and growth investment plans, covering both the risks and the rewards. So whilst the income yields from the FTSE 100 remain under pressure, what better way to start 2017 than to review our best selling income plan, offering a high level of fixed monthly income. Some of you may be familiar with the plan, some of you may even have invested or reinvested into the plan, which remains popular year after year with a wide range of income seekers.

In a nutshell

Investec’s FTSE 100 Enhanced Income Plan is a relatively straightforward plan to understand. It pays a fixed rate of income, every month, for a fixed term. Therefore, your income is paid regardless of what happens to the stock market. The ‘FTSE 100’ in the plan title refers to what happens to your original investment, with your initial capital returned at the end of the term unless the FTSE 100 Index falls by more than 50% during the plan term. If it does, and also finishes below its starting value, you will lose 1% for each 1% fall in the Index. This plan therefore puts your capital at risk.

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 ways to supplement your pension or savings income, the need for income is one of the most common demands put on our capital. Traditional investment funds only tend to offer a variable income, whilst also putting your capital at risk on a daily basis. Rather uniquely in the income investment space, this plan combines a fixed income with some degree of capital protection.

Where have all the fixed rates gone?

In contrast to the high levels of the FTSE 100 Index we have experienced recently, fixed savings rates are still at record lows. With no realistic prospect of any sudden sharp increases, let alone a return to the 4%+ rates that were around five years ago, 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 likely to be attractive to a wide range of income seekers. 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 5.04% 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 5.04% p.a. on offer from the latest issue, this equates to 0.42% paid each and every month for the entire term of the plan.

Fixed term

The Enhanced Income Plan has a fixed term of six years and although you do have the option to withdraw your money early (and in this respect is not dissimilar to an investment fund), 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.

Many fixed rate savers will be used to a fixed term whilst this feature should also appeal to investors 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.

Some capital protection from a falling market

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 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. However, if it falls below this level, and is also below its starting value at the end of the six year term, your initial investment will be 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.

Credit ratings and agencies

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.

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.

Risk v reward

The principle of risk versus reward means that the search for potentially higher returns leads us to consider putting our capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit (capital protected) 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.

Our leading five year fixed rate bond is currently offering 2.01%, and so by accepting risk to your capital, you are increasing your fixed return by 3.03% a year (since the fixed income from this investment is 5.04% p.a.). With the savings 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 higher return.

Fair Investment view

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.”

The plan is open for new ISA investments up to the £15,240 allowance, Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments. The minimum investment is £3,000.

Click for more information about the Investec FTSE 100 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.

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.

FTSE income plans compared – offering up to 7.0% income

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Income investments are consistently our most commonly requested investment plans, with many also choosing to use their ISA allowance in order to receive the income tax free. It is therefore perhaps not surprising that we have seen an increase in the number of fixed term income investment plans available in the market. To this end, we compare three investment plans which between them offer up to 7% income, along with some capital protection against a falling stock market.

Income, income, everywhere

The need for income is one of the most common demands put on our capital, and with continued pressure from record low savings rates and uncertainty around future dividend yields, the defined return and defined risk from structured investment plans have meant these have become increasingly more popular with income seekers.

Features in common

The income plans under the spotlight here are the FTSE Dual Option Contingent Income Plan from Meteor, the FTSE Quarterly Contingent Income Plan from Focus and the FTSE Range Income Plan from Mariana. All three plans have a number of features in common, including:

Based on the performance of the FTSE 100 Index

Both the level of income and the return of your initial capital for all of these plans is dependent on the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’). The FTSE is widely recognised as the proxy benchmark for most investment managers, especially those investing predominantly in UK equities. Since the historical volatility is familiar to many investors, they are in a better position to consider the pros and cons of the plan within the context of the underlying investment and the potential income on offer.

Fixed term

All of the plans have a fixed term, and although you do have the option to withdraw your money early, the plans are designed to be held for the full term and early withdrawal could result in you getting back less than you invested. The fixed term may well appeal to those who need to know exactly how long their capital will be tied up for and can benefit from planning around this.

The Focus and Meteor plans also include the ability to mature early or ‘kick out’, which will occur if the Index has gone up by 5% or more at the end of each quarter, from year 2 onwards. If it does, a final income payment will be made along with a full return of your original capital, which may appeal to those who would like to re-consider their investment options should the FTSE rise.

Quarterly income

All three plans offer a quarterly payment frequency, and so investors have a regular opportunity to receive an income payment. Quarterly payments are a popular feature and could be attractive if you are looking for the opportunity to supplement existing income.

Up to 7.0% annual income

These plans are designed for investors looking for a high level of income, with a maximum potential income of between 5.4% and 7.0%. The main difference between the three plans is the level the FTSE has to be in order for the income to be paid each quarter. So depending on what you think might happen to the FTSE in the coming years, these plans cater for a wide range of investor views by covering a number of eventualities.

7.0% income if the FTSE does not fall more than 20%

Option 2 of the Meteor Dual Option Contingent Income Plan offers a quarterly payment of 1.75% provided the FTSE at the end of each quarter has not fallen by more than 20% from its value at the start of the plan.

6.50 % income if the FTSE does not fall more than 25%

The FTSE Quarterly Contingent Income Plan from Focus offers up to 6.50% each year, with a 1.625% 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 – so it can fall up to 25% and you would still receive an income payment.

5.40% income if the FTSE does not fall more than 40%

Option 1 of Meteor’s Dual Option Contingent Income Plan offers a quarterly payment of 1.35% provided the FTSE at the end of each quarter has not fallen by more than 40% from its value at the start of the plan.

7.0% income provided the FTSE stays within an increasing range

The FTSE Range Income Plan pays 1.75% at the end of each quarter, provided the FTSE 100 Index closes between an upper and lower range based on its level at the start of the plan. This range starts at +/- 12% at the end of quarter one, and then increases by +/-0.75% each quarter finishing at a range of +/- 29.25% in the final quarter.

With all plans, if the FTSE falls outside of the level required at the end of each quarter, no income will be paid for that quarter.

Conditional capital protection

Another feature of these plans, which sets them apart from other capital at risk income investments, is the conditional capital protection. This means that your initial capital is returned in full at the end of the term provided the FTSE 100 Index has not fallen by 40% or more below its value at the start of the plan. This is measured at the end of the investment only and offers investors some capital protection against a falling stock market.

If the FTSE has fallen below this level, your original capital will be reduced by the same percentage as the fall in the Index. In this situation at least 40% of your initial investment would be lost, so you should understand that your capital is at risk and that you could lose some or all of your investment.

Risk versus reward

With savings rates continuing at record lows, the principle of risk versus reward means that the search for potentially higher income returns leads us to consider putting our capital at risk. A good benchmark for assessing an investment therefore 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 additional risk to your income and capital.

Anything around 2.75% is currently a top savings rate in the longer term fixed rate bond market and so by accepting risk to your capital, you have the opportunity to increase your income by up to 4.25% a year, depending on which income plan you invest in. The decision is therefore whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in return for a potentially higher level of income.

Credit ratings and agencies

With structured investment plans your capital is used to purchase securities, normally issued by a bank (the counterparty), which are designed to produce the stated returns. This means their ability to be able to meet their financial obligations become an important consideration. This is known as credit risk and means that in the event of the counterparty going into liquidation, you could lose future income returns and some or all of your initial investment. These plans are also not covered by the Financial Services Compensation Scheme for default alone.

One accepted method of determining credit worthiness of a company is to look at credit ratings, issued and periodcially reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit agency and has attributed the following ratings to the counterparties used in the above plans (as at the start of their offer periods):

Plan Counterparty S&P rating
Focus Credit Suisse ‘A’ rating with a stable outlook
Mariana Natixis ‘A’ rating with a stable outlook
Meteor Natixis ‘A’ rating with a stable outlook

The ‘A’ rating denotes a strong capacity to meet its financial commitments and repay debts, whilst the ‘stable outlook’ indicates that the rating is not likely to change in the short to medium term (between 6 months and 2 years).

Fair Investment conclusion

Commenting on the current range of FTSE based income plans, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “By combining the potential for a high level of income with some capital protection should the stock market fall, these plans could offer a compelling balance of risk versus reward when compared to other income alternatives available in the market.”

He continued: “With the opportunity for up to 7.0%, the headline yields are attractive for plans based on the performance of the FTSE whilst the cap on any income is balanced with the conditional capital protection included. Depending on what you think might happen to the FTSE in the coming years, there should be something here for every investor.”

Click here for more information on Meteor’s FTSE Dual Option Contingent Income Plan »

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

Click here for more information on Mariana’s FTSE Range Income Plan »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

These are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Income payments are not guaranteed and 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.

Our 10 best last minute ISA ideas

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With just one week to go until the deadline for using your 2015/16 ISA allowance of £15,240, this really is your last opportunity to make use of this valuable tax break and help protect your returns from the taxman. If you are yet to make use of some or all of your allowance, here we give you our 10 best last minute ISA ideas. Including both Cash ISA and Investment ISAs, as well as opportunities where you can include your 2016/17 ISA allowance (£15,240) as well, there should be something for everyone.

1.   Our best-selling Investment ISA

For those looking for growth but also with the opportunity to mature early or ‘kick out’ each year, the Enhanced Kick Out Plan offers 11.50% for each year invested provided the FTSE 100 Index at the end of each year is higher than its value at the start of the plan (subject to averaging). Capital is at risk if the FTSE falls by more than 50%. This is our best selling Investment ISA during the current ISA season and also features a Double ISA option.  Click here for more information »

2.   Fixed income Investment ISA

The Enhanced Income Plan is a regular ISA season top seller, paying a fixed income of 5.28% per year regardless of what happens to the stock market. The plan also has monthly income payments, so you know exactly how much you will paid, when, and for how long. Capital is at risk if the FTSE 100 Index falls by more than 50%. This plan features a Double ISA option.  Click here for more information »

3.   Self-select Investment ISA top seller

Barclays Stockbrokers has been voted ‘Best Execution-Only Broker’ at the Shares Awards 2015 whilst they have also been voted Self Select ISA Provider of the Year 2016 at the ADVFN International Financial Awards. Their investment ISA offers over 2,000 funds as well as a wide range of other investments including shares, exchange traded funds, investment trust, gilts and bonds.  Click here for more information »

4.   Defensive Investment ISA best seller

The Defensive Growth Plan from Investec offers a fixed return of 36% (equivalent to 5.25% compound annual growth) plus a return of your original capital, provided the FTSE 100 Index has not fallen by 50% or more at the end of the investment term. If it has, no growth will be achieved and your capital will be reduced by 1% for each 1% fall. This plan also features a Double ISA option.  Click here for more information »

5.   Income Investment ISA top seller

The FTSE Quarterly Contingent Income Plan pays a quarterly income of 1.875% for each quarter the FTSE 100 Index does not end less than 25% below its value at the start of the plan. So even if the FTSE falls up to 25% each quarter, you would still achieve 7.50% annual income. Capital is at risk if the FTSE has fallen by more than 40% at the end of the investment term. This plan features a Double ISA option.  Click here for more information »

6.   Managed and regular saver Investment ISA

The Standard Life Stocks & Shares ISA includes their ‘Easy Option ISA’, which allows investors to invest in one of their MyFolio Managed Funds run by a team of experts at Standard Life Investment Ltd. You can manage your account online and your ISA can be opened from just £50 per month with transfers from other ISAs permitted.  Click here for more information »

7.   Defensive supertracker Investment ISA

Defensive plans remain popular and the FTSE Defensive Supertracker from Meteor tracks any growth in the FTSE during the plan term and then trebles it, subject to a maximum growth return of 60%. The plan is defensive since the growth is based on any rise above 80% of the FTSE’s value at the start of the plan – that’s a 60% return even if the FTSE ends the same. Capital is at risk if the FTSE has fallen by more than 40%. This plan also features a Double ISA option.  Click here for more information »

8.   Instant access Cash ISA

For savers looking to combine a top interest rate with access to their money at all times, the Easy Access ISA from AA offers a simple, bonus-free savings rate of 1.25% AER variable. The account can be opened and managed online with just £100 and there are unlimited free withdrawals. The account also accepts transfers in. There are no penalties, notice periods or tiered interest rates, whilst interest is calculated daily and paid in March each year.  Click here for more information »

9.   Fixed rate Cash ISA

If you are looking for the reassurance of a fixed savings rate and don’t need access for your money for at least a year, fixed rate Cash ISAs are a popular option. The 1 Year Fixed Rate Cash ISA from AA currently offers 1.35% AER fixed and can be opened with a single deposit of £500. The account also accepts transfers in. Withdrawals are not permitted and 90 days loss of interest will apply if you access your money during the fixed term. You can apply and manage your account online whilst interest is calculated daily and paid at the end of your 12 month fixed rate period.  Click here for more information »

10.  Help to Buy Cash ISA

First time buyers can benefit from a 25% bonus of their Help to Buy ISA balance with a minimum bonus of £400 (so you need at least £1,600 saved) and a maximum of £3,000 (on a savings balance of £12,000) although you can have more saved. That means for every £200 you save HM Government will add £50, up to a maximum of £3,000. Eligibility criteria and Help to Buy: ISA Scheme Rules apply. Also note that any funds withdrawn before closing the account will not count towards the Government Bonus. The Nationwide Help to Buy: ISA is currently offering 2.00% AER variable with a minimum opening balance of £1.  Click here for more information »

 

Click here to compare Cash ISAs »

Click here to compare Investment ISAs »

Click here to compare our Top 10 Investment ISA plans »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. 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 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. The past performance of the FTSE 100 Index is not a guide to its future performance.

Some of the investments mentioned are structured investment plans that 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.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.

2016 ISA season selections – our Top 5 Investment ISAs

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With well under a month to go, time is running out to maximise the valuable tax benefit of your ISA allowance before the deadline on 5th April 2016, otherwise it will be lost forever. This has already been a very busy ISA season, and with Cash ISA savings rates continuing at uninspiring levels, it is perhaps not surprising that last season’s rise in the number of Stocks & Shares ISAs is a continuing trend. With the need to review existing ISAs, as well as making sure any new ISA investments offer the opportunity for competitive returns, we bring you our most popular Investment ISAs.

Our Top 5 Selections

Below we have listed some of our most popular Investment ISA plans, featuring both income and growth investments. With income needs continuing to play a critical role for many investors, the attraction of having tax free income is understandable. Whilst for investors looking for growth, included are those plans which take a defensive view on the stock market, as well as investments with the opportunity to mature early or ‘kick out’. Our head of savings and investment, Oliver Roylance-Smith, also offers a Fair Investment view for each plan.

Your ISA allowance

The ISA allowance for the current tax year is £15,240, whilst all of the plans detailed below accept Cash ISA and Stocks & Shares ISA transfers. Each plan also offers a Double ISA option, whereby you can invest the current tax year ISA allowance and next tax year’s ISA allowance (2016/17 tax year ISA allowance is also £15,240) via one application form – thereby offering the opportunity to invest up to £30,480 into new ISAs. Please check the individual plan for further details and for any application deadlines that apply.

Potential for 11.50% annual growth

With the potential for double digit returns and the opportunity to mature early from year one onwards, the Investec Enhanced Kick Out Plan has been our best selling Investment ISA this year. The plan will return 11.50% annual growth (not compounded) provided the value of the FTSE 100 Index at the end of each year is higher than its value at the start of the plan (subject to averaging). Your initial capital is at risk if the Index falls by more than 50% during the term, and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall.

Fair Investment view: “Depending on your view of what will happen to the FTSE, the ability to achieve 11.50% annual growth, even if the Index stays relatively flat, perhaps helps to explain why this plan has proved so popular. The current issue also sees the highest potential return on offer from this plan since 2012, so if the combination of high growth returns, the ability to mature early, as well as some capital protection against a falling market sounds appealing, this might make for a compelling opportunity in the current investment climate.”

Click here for more information »

 

Up to 7.50% annual income

The FTSE Quarterly Contingent Income Plan from Focus offers a quarterly payment of 1.75% during the plan if at the end of each quarter, the value of the FTSE 100 index has not fallen more than 25% from its value at the start of the plan. Therefore, the Index can fall up to 25% at the end of each quarter and you would still receive 7.50% annual income, but if the Index falls by more than this, no income would be paid for that quarter.

Your initial investment is returned at the end of the plan provided the FTSE has not fallen by more than 40%, measured at the end of the fixed term only. If it has fallen below this level, capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “Those seeking income from their investments often put the potential yield and frequency of payments as their top priorities, so the headline yield of up to 7.50% is attractive and the cap on any income is balanced against the conditional capital protection thereby offering an attractive balance of risk v reward. It’s has been a while since we’ve been able to talk about the potential for up to 7.50% income from a plan based on the performance of the FTSE, and compared to other income alternatives available in the market, this plan could offer an attractive option.”

Click here for more information »

 

5.28% fixed income each year

Our next plan is from Investec and is our best selling income investment this year, for both ISA and non-ISA investors. The current issue of the Enhanced Income Plan pays a fixed income of 5.28% per year, with monthly payments of 0.44% paid to you regardless of the performance of FTSE.  Capital is at risk if the FTSE falls by more than 50% during the investment term. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall, so you could lose some or all of your original investment.

Fair Investment view:One of the attractions of an ISA is that it allows income to be generated that would otherwise be subject to income tax, whilst the Enhanced Income Plan offers a high fixed income that is paid to you regardless of the performance of the stock market. Knowing exactly how much you will be paid, when and for how long are clearly features that could appeal, whilst the monthly payment frequency is usually the most sought after. The combination of a regular fixed income and a return of capital unless the FTSE 100 Index falls by more than 50%, could offer a competitive balance of risk versus reward that might be considered by both savers and investors.”

Click here for more information »

 

36% return even if the FTSE falls up to 50%

Defensive plans offer investors a competitive return on their capital even if the stock market fails to go up. As a result, they have risen in popularity in the last few years and the recently launched Defensive Growth Plan from Investec is no exception. The plan offers a fixed return of 36%, provided the FTSE 100 Index at the end of the term, is more than half of its value at the start of the plan (subject to averaging). So the FTSE can fall up to 50% and you still receive a fixed growth return of 36%, equivalent to 5.25% compound annual growth. If the FTSE falls by 50% or more, no growth will be achieved and your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “Whilst the FTSE continues at what are still historically high levels, it is understandable why many investors are considering defensive investment plans and with a product headline of a 36% growth return unless the FTSE 100 Index falls by 50% or more, the risk versus reward of this plan is relatively easy to understand. So depending on your view of what might happen to the FTSE in the medium term, the ability to produce over 5% compound annual growth provided the market does not fall 50%, could make for an innovative investment opportunity.”

Click here for more information »

 

Triple the rise in the FTSE above 80% of its starting value

Following this defensive theme is our most popular ‘supertracker’ plan, the FTSE Defensive Supertracker from Meteor. The ‘supertracker’ part means your investment tracks any growth in the FTSE 100 Index during the term of the plan and then triples it, whilst the plan is ‘defensive’ since this growth is based on any rise above 80% of the FTSE’s starting value. Therefore, provided the FTSE has not fallen by more than 20%, you will receive triple any growth, subject to a maximum return of 60%. Therefore, this maximum return is achieved provided the FTSE ends the same or higher than its value at the start of the plan.

If the FTSE has fallen by more than 20%, no growth will be paid and your original investment will be returned in full unless the FTSE has fallen by more than 40%. If it has, your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “For those investors concerned about the historically high level of the FTSE and would therefore like to include a defensive element to their investment, this plan offers the opportunity for investment level returns not only if the FTSE goes up, but also if it stays flat or even goes falls up to 20%. By combining this with some capital protection should the stock market fall, this plan could offer a compelling balance of risk versus reward for those who are not confident that the FTSE will rise significantly in the medium term.”

Click here for more information »

 

Important reminder – why do an ISA?

One of the main reasons for using an ISA is it’s tax treatment since no tax is payable on the income you receive, or any capital gains that you make, and there is also no need to declare any ISA income or capital gains on your tax return. They therefore provide tax efficient income or growth on your investment, the benefit of which can be compounded over time. See our Top 10 Tips for ISA season for further help and tips on how to make the most from this important time of year. Please also note that with all of these investments, our experienced Investment Customer Services team is available on 0845 308 2525 to answer any questions you may have.

How to apply

When you click for more information on any of the above plans you will be able to request a brochure pack which will be sent to you by post and email. This will include everything you need to invest, whether applying for an ISA, transferring existing Cash ISAs and/or Stocks & Shares ISAs or making on-ISA investments. Also note that these plans have different application deadlines, and may also close early so it is important to submit your application as soon as possible. Minimum investments and arrangement fees also apply.

Click here to compare Investment ISAs »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular 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 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.

These are structured investment plans which 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.

Tax free income using your ISA allowance

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With only 5 weeks until the end of the tax year, time is running out to maximise the valuable tax benefit of your 2015/16 ISA allowance, before it is lost forever. We have been helping ISA savers for well over a decade, and history shows us that many investors will be looking for the opportunity to receive tax-free income from their ISA allowance. With the current tax year ISA limit of £15,240 only available to use before 5th April, now could be a great time to make the most of tax-free income opportunities, as well as looking towards income ISA options for the new tax year ahead.

Why seek income from your ISA allowance?

When it comes to investing, generating an income is one of the most common demands we put on our capital, and so the opportunity to receive tax-free income is one that investors will not want to miss out on. As record low interest rates continue, and the returns available from fixed rate bonds remain largely unappealing, many are considering taking on more risk with their capital. Therefore, it is perhaps understandable why many investors are turning to income generating investment opportunities. Using your ISA allowance allows you to receive this income tax-free, thereby protecting more of your hard-earned capital from the taxman.

Take advantage of ISA transfers

Another priority at this time of year is to review your ISA transfer options. Reviewing any existing ISAs is sensible to do at regular intervals, to make sure you don’t squander the valuable tax efficient benefits of your ISA savings. Checking for low interest bearing Cash ISAs or poorly performing Investment ISAs is a prudent measure, and if you find that your current ISA is no longer offering a competitive deal, most ISAs permit you to transfer existing ISAs to them without charge – although don’t forget to check whether there are any penalties from your existing provider.

Frequency of income payments

There are many options to consider when seeking income from your capital via an ISA, including the level of income offered, degree of risk, and frequency of income payments. Investments can offer the option of annual, bi-annual or quarterly payments, but for those seeking regular income, a plan which offers monthly income payments is often the most appealing.

Defined return, defined risk

We feature two plans below, both of which offer you a defined return for a defined level of risk, which means that you know the exact terms of each plan prior to investing, and exactly what needs to happen in order to provide you with the stated returns. They also include what is known as conditional capital protection, whereby your original capital is returned at the end of the plan term, as long as the underlying investment has not fallen by more than a specified amount, normally a percentage of its starting value.

Investors can then decide based on the likelihood of this happening in combination with the income on offer. This is a unique feature of structured investments and is in contrast to other income investments where your capital is exposed to day to day stock market risk and fluctuations in value. As savers continue to face the impact of record low savings rates, this feature could be an attractive option for those considering taking on investment risk with some of their capital.

Tax-free income options using your ISA allowance

All of the investment plans featured on www.fairinvestment.co.uk are available as New ISAs and accept ISA transfers (as well as non-ISA investments) although note any application deadlines that may apply. The income paid from an investment held within an ISA is not then subject to tax, thereby resulting in the potential for an attractive stream of tax free income. To help you compare ISA investment options for income, here are two of our ISA season income best-sellers:

5.28% fixed income, monthly payments

The FTSE 100 Enhanced Income Plan from Investec has been one of our best selling income investments for a number of years, and it is particularly popular during the ISA season. The main appeal of the plan is that it offers a fixed income which is paid to you each month, regardless of the performance of the FTSE 100 Index. The annual income is currently 5.28% (paid as 0.44% each month).

The plan will also return your initial capital at the end of the term unless the FTSE falls by more than 50% during the plan term. If it does, and fails to recover by the end of the term, your initial capital will be reduced by 1% for each 1% fall, so you could some or all of your initial investment.

Fair Investment view: “One of the attractions of an ISA is that it allows income to be generated that would otherwise be subject to income tax. Should you invest in this plan directly (i.e. outside of an ISA), the income would normally be subject to income tax. Using your ISA allowance therefore offers basic rate tax payers the equivalent of 6.60% each year, and for higher rate taxpayers this rises to 8.80%.

The high level of fixed income and the monthly payment frequency are popular features and combined with a fixed term, means the investor knows exactly how much they will be paid, when, and for how long, whilst also having some capital protection against a falling stock market. The current issue of the plan also offers a Double ISA option, with the opportunity to invest using both your 2015/16 and 2016/17 ISA allowances.”

Click here for more information on the Investec FTSE 100 Enhanced Income Plan »

 

Up to 7.0% yield, quarterly payments

The Focus FTSE Quarterly Contingent Income Plan offers the potential for up to 7.0% annual income dependent on the performance of the FTSE 100 Index. The plans pays a quarterly income of 1.75% provided the value of the Index at the end of each quarter has not fallen by more than 25% from its value at the start of the plan. If the Index is below this level, no income would be paid for that quarter.

Your initial capital is returned at the end of the plan provided the FTSE has not fallen by more than 40%, measured at the end of the fixed term only. If it has fallen below this level, your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “It’s has been a while since we’ve been able to talk about the potential for up to 7.0% income from a plan based on the performance of the FTSE, but the latest issue of this popular income investment offers exactly that. The 25% barrier means that the FTSE can fall up to 25% at the end of each quarter and you would still receive 7.0% annual income. With typical yields on UK equity income funds feeling the strain at the moment, this investment could be a timely addition to those seeking high yield investment opportunities.”

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

 

Don’t miss out – use it or lose it…

For those looking for income it has perhaps never been more important to manage your savings and investments carefully, and making the most of your tax-free ISA allowance should be a top priority. With only 5 weeks to go until the end of the tax year and the ISA investment deadline, it’s important to make the most of this opportunity, as well as planning ahead to maximise your tax-free income for the forthcoming tax year.

The income investments detailed above are available for individuals to use their ISA allowance and will also accept ISA transfers (from both Cash ISAs and Stocks & Shares ISAs) and non-ISA investments, with minimum investments from £3,000. The current issues of both plans also offer a double ISA option, so investors can use this year’s and next year’s ISA allowance on one application form. For the current tax year (2015/16) the annual New ISA allowance is £15,240 and this is also the limit for the next tax year (2016/17) which starts on 6th April 2016. You can therefore invest up to £30,480 into new ISAs that give you the opportunity to receive a regular tax free income.


Click here to find out more about the Investec Enhanced Income Plan »

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

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

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 their future performance. These investments do not include the same security of capital as a deposit account.

Investment Focus: Focus FTSE Quarterly Contingent Income Plan

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Income investments are without doubt our most commonly requested investment plan, whether by investors looking to use their ISA allowance, or income seekers simply adding to or transferring existing investments in the hunt for a high return and regular income. We therefore take a look at one of our most popular income plans, aimed at those looking for a high yield opportunity along with quarterly payments. Offering a potential 7% income along with some capital protection against a falling stock market, we expect the current issue of the Focus FTSE Quarterly Contingent Income Plan to be popular with both new and existing investors.

Income remains a top priority…

Income needs remain a top priority for both savers and investors, evidenced by the increasing number of our existing customers and those new to Fair Investment looking for income opportunities. Income is without doubt the most common demand put on our capital and as the need commonly increases the older we get and we start to reduce our working hours or look towards retirement, so the challenging task of finding a competitive income solution becomes increasingly important.

As we continue to face income pressure from sustained low interest rates and with uncertainty around the impact the recent volatility in the FTSE may have on future dividends, the hunt for high yield opportunities increases. This is where the balance of risk versus reward on offer from this plan is certainly worthy of consideration, and is one particular option that is proving popular with our income seekers.

In a nutshell

The FTSE Quarterly Contingent Income Plan from Focus (Credit Suisse acting as counterparty – see below) offers investors an annual income of up to 7.0% with quarterly income payments, and has a maximum fixed term of six years, although it could also mature early or ‘kick out’ at the end of each quarter from the end of year 2 onwards.

Your capital is returned if the plan does mature early, or at the end of the term provided the FTSE 100 Index has not fallen by more than 40% from its value at the start of the plan. This is known as conditional capital protection and is one of the plan’s main differentiators when compared to UK equity income or other investment funds. If it has fallen below this level, your initial capital is reduced by 1% for each 1% fall in the Index, so you could lose some or all of your initial investment.

Potential for up to 7.0% income

This issue of the plan has already proved popular since its launch and one of the reasons is the potential headline yield of 7.0%, the highest we have seen for this investment for some time. For each quarter the FTSE ends above 75% of its value at the start of the plan, a 1.75% income payment is paid for that quarter. If the FTSE has fallen below this 75% ‘barrier’ (i.e. it has fallen by more than 25%), no income will be paid for that quarter.

Therefore, should the FTSE remain above 75% at the end of each quarter the maximum annual income of 7.0% is achieved. This means that the investor knows exactly what needs to happen in order to provide the stated level income, when each income payment becomes due, as well as how long any income payments are payable for.

Quarterly payments

Another popular feature is the quarterly payment frequency since this provides a regular opportunity to receive an income payment. So not only does the investment provide the potential for a competitive level of income, but it also pays any such income payment on a quarterly basis which could be attractive to a number of investor scenarios.

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

The FTSE Quarterly Contingent Income Plan has a maximum term of six years and although you do have the option to withdraw your money early, the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested. The plan also has the ability to mature early or ‘kick out’, which will occur if the Index has gone up by 5% or more at the end of each quarter, from the end of year 2 onwards. If it does, a final income payment will be made along with a full return of your original capital, which may appeal to those who would like to re-consider their investment options should the FTSE rise.

Conditional capital protection

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

Compared to investment funds

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

This is an important difference since the income yield and any rise or fall to your original capital should always be considered together since both have an effect on your overall return. For example a 7% income yield on an investment fund is compelling in its own right but not so if it coincides with a 7% reduction in the value of your capital. However, remember that this can of course work in your favour if capital growth is positive.

Credit ratings and agencies

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

One accepted method of determining credit worthiness of a company is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit agency and as at 9th June 2015, Credit Suisse has been attributed a long term ‘A’ credit rating with a stable outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments but could be more susceptible to adverse economic conditions than companies in higher-rated categories, while the stable outlook indicates that the rating is not likely to change in the short to medium term (between 6 months and 2 years).

About Credit Suisse

Credit Suisse is one of the world’s leading financial services providers operating in over 50 countries. Founded in 1856, they now serve around 2.1 million clients around the world, operating as an integrated bank with business split between two divisions: Private Banking & Wealth Management and Investment banking. They are also one of the largest global asset management businesses, with assets under management of almost £880 billion (as at the end of September 2015). They employ around 48,100 people in more than 122 offices around the world.

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 (since this investment does not include the same security of capital as a deposit account).

Anything around 3.0% to 3.1% is currently available on longer term fixed rate bonds with considerably lower rates on offer for fixed rate Cash ISAs. Therefore by accepting risk to your capital you have the potential to at least double the income on offer. Remember this plan also has the potential to mature early each quarter from the end of year 2 onwards. One of the key considerations therefore is to decide whether you are comfortable with putting your capital at risk in conjunction with the conditional capital protection on offer, in return for a potentially higher level of income.

Fair Investment conclusion

When considering income investments, it is important to fully understand how each works and the risks that one takes on. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remember that it is the income and capital loss/rise combined that effect your overall return.

Commenting on the plan, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith said: “It’s has been a while since we’ve been able to talk about the potential for up to 7.0% income from a plan based on the performance of the FTSE, and compared to other income alternatives available in the market, this plan could offer a compelling option.”

He continued: “The headline yield is attractive and the cap on any income is balanced against the conditional capital protection thereby offering an attractive balance of risk v reward. By offering 7.0% income even if the FTSE falls up to 25%, we expect this plan to be popular so you may need to act quickly if you want to invest in this latest issue.”

The plan is open for New ISA investments up to the £15,240 allowance for the current tax year (2015/16), Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments. The minimum investment is £5,000.


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

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance. This investment does not include the same security of capital as a deposit account.