Posts Tagged ‘investments’

Summer sizzlers: our hottest savings and investment ideas this summer

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Last updated: 29/08/20176

Whilst our sprinters surged forward to a compelling and action packed final weekend at the World Championships, the Bank of England on the other hand refused to take action and raise interest rates this month by keeping the base rate at a record low of 0.25%. With no indication whether the Bank of England will raise interest rates any time soon, this is a useful reminder for both savers and investors to regularly review their options. So to help you stay on top of what the current market has to offer, we bring you a selection of some of our most popular savings and investment deals available this summer.

Interest Rates

The economic landscape has not changed much since the Bank of England maintained its record low position on interest rates. The base rate of interest remains at 0.25%, and with it the vast majority of savings rates have continued to sit well below inflation. And the future not only looks bleak for savers, but investors too as the higher yielding FTSE 100 companies begin to show signs of strain, with factors such as currency feeding concerns that these dividends look increasingly unsustainable and so are likely to fall.

So both savers and investors face the same dilemma: how can I make the most out of my capital this summer?

Under the Spotlight

Unfortunately, for many savers longer term financial products no longer provide the 5%+ returns of yester-year, and this significant drop in headline savings rates has made it much harder to commit to tying up money for longer periods of time. As a result of this, we have seen a lot of activity this summer in the shorter term savings space, particularly into instant access and current accounts.

In addition, savers have seen interest rates stagnate and their savings being increasingly eroded with the impact of higher inflation. This has led to some having to consider taking on more risk with some of their capital, in the hope of achieving the levels of returns they have enjoyed in previous years. So we also cover some of our income and growth investment best sellers.

Current Accounts

Up until a few years ago, current accounts were infamous for their low interest rates, with most paying nothing at all on any monthly balances. However, in the last few years banks have placed an emphasis on improving their products, with some banks offering very competitive rates in order to win new customers.

Whilst the majority of these accounts place a cap on the amount that they are willing to pay interest on, the rates themselves are attractive. Therefore, if you’ve not switched for a while, it may be beneficial to compare these to your existing current account and find out how much more you could earn from your everyday cash.

The Santander 1|2|3

The Santander 1|2|3 current account provides the opportunity to receive 1.50% AER variable on your entire balance up to £20,000, a rate that is higher than the market leading instant access account (see below). It also has the added bonus of providing up to 3% cashback on various household bills including gas, electricity, water, broadband and even your Santander mortgage. This account has a monthly fee of £5, and their website allows you to compare the annual cost with the amount of interest you could earn plus any cashback on your current monthly bills.

Instant Access

An instant access account may be an attractive option for those who might need access to their cash at very short notice. These are savings accounts that pay interest and allow you to withdraw money whenever you need it. Generally, you decide how much or little you put into the account.

Ulster Bank eSavings

For those who wish to enjoy the freedom of banking on the go, along with a market leading interest rate, Ulster Bank’s eSavings may be one of the best options. The account can be opened completely online and then managed online, via their banking app or over the telephone. Ulster Bank eSavings account offers 1.25% AER variable, with no tiered interest and no minimum deposit.

According to the Bank of England, the average instant access account is currently paying only 0.15%*. Based on a balance of £50,000, the eSavings account would pay £625 per year compared to just £75 from the average account, which is an additional £550 per year.

RCI Bank Freedom Savings Account

RCI Bank Freedom Savings Account offers 1.20% AER variable gross to both new and existing customers for any amount up to £1,000,000. Although the account requires an initial payment of at least £100 within the first 30 days of opening, the account is free to use and there are no fees, penalties or tiered interest rates. RCI Bank is part of the Renault global banking group and so the first €100,000 is protected by the French deposit guarantee scheme (FGDR) rather than the UK FSCS.

Short Term Fixed Rate Bonds

For many savers, the majority of longer fixed term rate bonds simply do not offer enough of an uplift in rate to justify having your money tied up for extended periods of time. For many savers therefore, it may be beneficial to consider shorter term fix rate bonds.

Access Bank UK offer short term fixed rate bonds that provide competitive rates. In order to access these rates you must make a minimum deposit of £5,000 and each account has a maximum deposit of £500,000. Although you can only make one deposit per account, Access Bank UK doesn’t put a cap on the amount of accounts you can open at once. All deposits are eligible for FSCS protection.

1 Year Access Bank: offers an interest rate of 1.70% AER fixed for 1 year

2 Year Access Bank: provides a fixed interest rate of 1.90% AER over 2 years

Medium and Longer Term Fixed Rate Bonds

For savers willing to part with their money for a longer period of time to receive higher returns, Vanquis Bank has a selection of products offering very competitive interest rates. There is a minimum deposit of £1,000 and a maximum deposit of £250,000. No withdrawals are allowed over the course of the fixed term and all deposits are eligible for FSCS protection.

3 Year Vanquis Bank: offers an interest rate of 2.20% AER fixed

4 Year Vanquis Bank: offers an interest rate of 2.35% AER fixed

5 Year Vanquis Bank: offers an interest rate of 2.50% AER fixed

Capital At Risk

Capital at risk products allow investors to access potentially higher interest rates at the expense of accepting their capital will be at risk.

Risk versus Reward

The balance of the potential upside of higher returns versus the potential downside of losing some or all of your capital is generally known as risk versus reward. 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 prepared to accept the level of risk to your capital in return for either a higher fixed rate, or the potential for a higher variable income.

Fixed Income Investment

Investec FTSE 100 Enhanced Income Plan

If you need to know exactly how much you will get paid, when and for how long, Investec’s FTSE 100 Enhanced Income Plan may be an option to consider. This plan offers a fixed interest rate of 4.35% per year for the fixed term of 5 years, and offers monthly income payments. The plan offers some capital protection but if the FTSE falls by more than 40% then you may lose some or all of your capital.

Higher Yield, Variable Income Investments

For those looking for higher income opportunities, the Meteor and Investec plans below offer up to 8% interest per annum, but rather than a fixed income, how much you receive is dependent on the performance of the FTSE 100 Index. Each plan also has the ability to mature early (or ‘kick out’) in the event that the FTSE has gone up by 5% or more from the second year onwards – measured each year and each quarter respectively. If the plan does not mature early, your capital will be at risk if the FTSE has fallen by more than 40% at the end of the plan term. If it has, you will lose some or all of your initial capital invested.

Meteor FTSE Monthly Income Plan: this plan has a maximum term of 10 years and offers a potential monthly income of 0.67% (equivalent to 8.04% annually).

Investec FTSE 100 Defensive Income Plan: this plan has a maximum term of 8 years and offers a potential quarterly payment of 2.0% (equivalent to 8.0% per year).

Defensive Growth Investment

The Investec Defensive Step Down Kick Out Plan is our most popular defensive investment and has the potential to return 6.25% for each year invested, provided the FTSE finishes at 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 reduces by 5% each year thereafter, down to 65% in the final year (i.e. if can fall up to 35% and you still receive your growth return).

If the FTSE is below the required level each year then no growth will be achieved and at the end of the plan your original capital will be returned. However, it is important to note that if at the end of the plan the FTSE 100 Index has fallen by more than 40% from its level at the start of the plan, your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Compare our summer’s most popular savings and investment ideas

Compare our current accounts »

Compare instant access accounts »

Compare fixed rate bonds »

Compare fixed income investments »

Compare higher yield, variable income plans »

Compare defensive growth investments »

 

* Source: Bank of England: Bank of England average quoted household interest rates for instant access savings, 31st July 2017

 

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

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

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.

The investments in this article 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 due to the performance of the FTSE 100 Index. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In 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.

Investment Focus: investment returns even if the FTSE falls 50%

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Last update: 27/09/2016

A defensive plan is simply a plan that is designed to provide an investment return even if the stock market fails to rise, or in some circumstances goes down slightly. They are therefore an option for those who would like the opportunity for investment level returns, but who are not confident the market will rise significantly in the medium term. The main feature of the Defensive Growth Plan from Investec is that returns are achieved even if the market has fallen by as much as 50% at the end of the fixed term. Here we take a closer look at the plan in order to find out why it has proved so popular with our investors.

The FTSE

Apart from a handful of days in 2015 and earlier this year, the closing level of the FTSE has been above 6,000 points since the start of 2013, and we have also seen the highest closing level on record (7,104 points), achieved towards the end of April last year. Whilst the FTSE has remained at what are historically high levels, defensive investment plans that offer the potential for investment level returns even if the stock market fails to rise or, in some scenarios, even falls slightly, have been an increasingly popular choice with our new and existing investors.

Defensive investments – a middle ground

Defensive investments attempt to offer investors the best of both worlds, by balancing less of the investment upside, with the opportunity to achieve these returns even if the market fails to rise. This means they are designed for investors who have a neutral or negative outlook of what could happen to the stock market in the coming years, and yet who would still like the opportunity to receive investment level returns. Based on the levels of the FTSE over the last few years, these arguably offer a compelling investment opportunity and Investec’s Defensive Growth Plan is one of our most popular.

In a nutshell

One of the latest additions to Investec’s highly competitive range of structured investment plans, the FTSE 100 Defensive Growth Plan offers a fixed return of 34% at the end of the six year term, provided the value of the FTSE at that point is equal to or higher than 50% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 50% and investors would still receive a 34% growth return, along with a full return of their original capital.

If the Index has fallen by more than 50% at the end of the term, 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.

34% return even if the FTSE falls 50%

This is a strong headline since investors will receive a positive return, even if the FTSE falls 50%. This means that even if you are not confident the FTSE will rise at all, you could still receive a fixed return of 34% unless the FTSE falls by more than 50%.

The ‘defensive’ feature

Since the fixed return on offer is dependent on the performance of the FTSE 100 Index, the defensive element of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 50% and the fixed return of 34% is still paid. Whilst the FTSE continues at historically high levels, this ‘defensive’ feature could be an appealing one.

The use of averaging

Whether the plan pays the 34% fixed return is determined by comparing the value of the FTSE 100 Index at the start of the plan with its value at the end of the plan or the ‘Final Index Level’. When calculating the Final Index Level 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.

Some capital protection from a falling market

Provided the FTSE 100 Index has not fallen by more than 50% at the end of the term, the 34% growth return is paid to you along with a full return of your initial capital. Should the Index have fallen by more than 50%, your initial investment is reduced by 1% for each 1% fall. It is important to note that in this scenario, you would lose at least 50% of your capital.

Since the market can fall up to and including 50% before your initial investment is at risk, the plan offers some capital protection against a falling market. This should be considered in conjunction with the potential return on offer when reviewing the plan’s overall risk versus reward.

Defined risk and defined returns

Another feature of this plan is that, as with all structured investments, the potential returns are stated up front, prior to investing. This allows the investor to consider the potential upside in the context of the amount of risk they are taking, since you know at the outset exactly what needs to happen in order to receive the stated level of growth as well as a return of your initial investment.

ISA only

Please note that this plan is only available as an ISA. The plan also accepts ISA transfers, from both Cash ISAs and Stocks & Shares ISAs.

Credit ratings and agencies

This plan is a structured investment and so your initial capital is used to purchase securities issued by Investec Bank plc. These securities are structured in a way so that they provide the growth and return of capital as described above, which 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 growth return 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 rated Investec Bank plc with a credit rating of BBB with a stable outlook (awarded 27th October 2015). 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.

Fair Investment view

Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “The ability to produce a 34% fixed return even if the market falls by 50% puts this plan in a category of its own, since most other defensive investments still require the FTSE to fall by no more than 20%.The risk versus reward of the plan is known at the outset and is relatively easy to understand, whilst by offering a competitive return even if the FTSE falls by up to half this plan is one of our best selling defensive investments. So for those who are not confident the stock market will continue to rise in the coming years, this plan could make for a compelling opportunity.”

The plan is open for New ISA investments up to the £15,240 allowance for the current tax year (2016/17) as well as Cash ISA and Stocks & Shares ISA transfers. The minimum investment is £3,000.

 

Click here for more information about the Investec FTSE 100 Defensive Growth Plan »

 

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

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring or switching 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.

BREXIT and the FTSE: defensive investment plans rise to the challenge

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Last updated: 11/10/2016

The recent decision made by the UK to leave the European Union has unsurprisingly forced many investors to reconsider their options, especially since there remains so much uncertainty around the potential impact of this decision on our economic growth and stability. Regardless of whether you were for remaining or leaving, taking a view on what might happen to the FTSE in the short to medium term is certainly something on the minds of many. With this in mind, we take a look at a selection of defensive investments to find out exactly what they have to offer and how the risk versus reward might be appealing for those who are concerned about the impact Brexit may have on future investment opportunities.

What is a defensive plan?

Defensive plans offer the potential for investment level returns, even if the stock market goes down, in some cases by up to 50%. Partly as a result of the FTSE continuing at historically high levels in recent years, there has been an increase in the number of plans that offer a competitive return even in the event that the market fails to rise. These are commonly known as defensive investment plans and for those who are not confident that the market will continue to rise in the medium term, they have become an increasingly popular investment opportunity.

Different types

Although each plan has its own features, collectively they are growth investments which offer the potential for either a fixed return for every year invested (not compounded), or a fixed return at the end of the full term, both of which are dependent on the performance of the underlying investment, usually the FTSE 100 Index. Each of these investments will be structured to offer a defined return for a defined level of risk, and as such you will know from the outset exactly what must happen in order to receive the stated returns on offer.

A middle ground

Defensive investments therefore try and offer the best of both worlds by offering the potential for investment level returns, even if the underlying investment only rises by a small amount, stays flat, or goes down slightly. This means they are designed for investors who have a neutral or negative outlook of what could happen to the stock market in the coming years, and yet who would still like the opportunity to receive the potential for investment level returns. Here is a selection of the current range of defensive plans on offer:

Returns even if the FTSE falls up to 10%

If the FTSE had fallen by 5% in 3 years time and yet you still received 24.0% growth plus a return of your initial capital, would you consider this a good investment? The Investec FTSE 100 Defensive Kick Out Plan has a maximum term of six years but will kick out (mature early) at the end of each year from year 3 onwards, provided the FTSE is above 90% of its value at the start of the plan. If it is, then you will receive 8.0% for each year invested (not compounded). If the Index has fallen by 10% or more, your investment continues.

If the plan does not produce a return, your initial capital is returned in full unless the Index has fallen by 50% or more, measured at the end of the plan term. If it has, your capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.

Returns even if the FTSE falls up to 20%

Our next defensive plan is another kick out plan, the FTSE Defensive Kick Out from Focus, and will kick out and return your initial investment along with 7.15% for each year invested (not compounded) provided the FTSE 100 is at the required level at the end of each year, from year 2 onwards. The required level is 100% of its starting value at the end of year two, reducing by 5% in each of the following years down to 80% in the final year. So the FTSE could fall up to 20% and you would still receive 7%+ returns on your investment.

If the Index closes below the required level each year, no growth return will be paid and your initial capital will be returned in full unless the FTSE has fallen by more than 40% at the end of the term. If it has, your initial investment would be reduced by 1% for each 1% fall, and so you could lose some or all of your investment.

Returns even if the FTSE falls up to 50%

Our final defensive investment is the Investec FTSE 100 Defensive Growth Plan, which offers a fixed return of 34% at the end of the investment term provided the value of the FTSE is more than 50% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 50% and investors would still receive a 34% growth return, along with a full return of their original capital. The 34% return is equivalent to 5.0% compound annual growth.

If the Index has fallen by 50% or more at the end of the term, 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

Commenting on defensive investment plans, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said: “Despite the recent volatility in the FTSE the Index currently remains at historically high levels, but for those investors who are not confident that the market will rise in the medium term, knowing that you can achieve investment returns regardless of whether the market goes up, remains flat, or even falls slightly, could be an attractive opportunity.”

He continued: “Markets don’t like uncertainty, and so it is understandable that investors are going to consider, perhaps more than normal, the potential impact of leaving the EU on the FTSE in the medium term. Since the market can fall up to 40% before your initial investment is at risk, defensive plans also offer some capital protection against a falling market, and allow potential investors to consider the risk versus reward of the plan prior to investing, which could be appealing in the current investment climate.”

 

More information on the Investec FTSE 100 Defensive Kick Out Plan »

More information on the Focus FTSE Defensive Kick Out Plan »

More information on the Investec FTSE Defensive Growth Plan (ISA only) »

Click here to compare defensive investment plans »

 

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

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 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 also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In 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 Defensive Growth Plan

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Defensive investment plans have grown in popularity as they offer investors who are not confident the markets will rise further the opportunity to produce a competitive return on their capital. But the start of the New Year has brought with it increased volatility in the market and it is against this backdrop that we review Investec’s FTSE 100 Defensive Growth Plan. So how does this latest addition to their range of fixed term defensive investment plans stack up?

FTSE levels

Apart from a few days during the summer and mid-December last year, the FTSE 100 Index had closed above 6,000 points on every day between 2013 and 2015. The lowest level was on 24th August 2015 when the Index closed at 5,898 points whilst the highest closing level over this period was 7104 towards the end of April last year. This level also represents the highest closing level of the FTSE on record, having broken through the 7,000 point barrier for the first time ever last March.

2016 and beyond

Whilst the FTSE has remained at what are historically high levels, defensive investment plans that offer the potential for investment level returns even if the stock market fails to rise or, in some scenarios, even falls slightly, have been an increasingly popular choice with our new and existing investors. However, the start of the New Year has already brought with it a rather different investment landscape. The FTSE opened 2016 at 6242.3 and yet closed last night at 5779.9, a drop of 462.4 points which is equivalent to a 7.4% fall in value. By any standards this is a sizeable reduction.

Please note that past performance of the FTSE 100 Index is not a guide to its future performance.

So what might this mean to us as investors and where do think the FTSE might go in the medium term? Well, if you have doubts that it will continue to reach the 7,000 point mark again in the coming years, or indeed surge pass this level, then this latest new launch from Investec might just be worth a closer look.

In a nutshell

The FTSE 100 Defensive Growth Plan aims to provide a fixed return of 36% at the end of the six year term and will do so provided the value of the FTSE at that point is higher than 50% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 50% and investors would still receive a 36% growth return, along with a full return of their original capital.

If the Index has fallen by 50% or more at the end of the term, 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.

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

This is a strong headline since investors will receive a positive return, even if the FTSE falls up to 50%. This means that even if you are not confident the FTSE will rise at all, you could still receive a fixed return of 36% unless the FTSE falls by 50% or more. The 36% return is equivalent to 5.25% compound annual growth.

‘Defensive’ feature

Since the fixed return on offer is dependent on the performance of the FTSE 100 Index, the defensive element of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 50% and the fixed return of 36% is still paid. Whilst the FTSE continues to remain at what are historically relatively high levels, this ‘defensive’ feature could be an appealing one.

The use of averaging

Whether the plan pays the 36% fixed return is determined by comparing the value of the FTSE 100 Index at the start of the plan (the closing level on 1st March 2016), with its value at the end of the plan or the ‘Final Index Level’. When calculating the Final Index Level 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.

Some capital protection from a falling market

Provided the FTSE 100 Index has not fallen by 50% or more at the end of the term, the 36% growth return is paid to you along with a full return of your initial investment. Should the Index have fallen by 50% or more your initial investment is reduced by 1% for each 1% fall. In this case you would lose at least 50% of your capital.

Since the market can fall up to 50% before your initial investment is at risk, the plan offers some capital protection against a falling market. This should be considered in conjunction with the potential return on offer when reviewing the plan’s overall risk versus reward.

Defined risk and defined returns

One of the features of this plan is that the potential returns are stated up front, prior to investing. This allows the investor to consider the potential upside in the context of the amount of risk they are taking since you know at the outset exactly what needs to happen in order to receive the stated level of growth as well as a return of your initial investment.

ISA only

Please note that the first issue of this new plan is only available as an ISA. The plan also accepts ISA transfers, from both Cash ISAs and Stocks & Shares ISAs.

Credit ratings and agencies

This plan is a structured investment so your initial capital is used to purchase securities issued by Investec Bank plc. These securities are structured in a way so that they provide the growth and return of capital as described and also means that Investec Bank’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 growth return 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 as at 27th October 2015, Investec Bank plc has a credit rating of BBB with a stable outlook. The ‘BBB’ rating denotes a good credit quality with low expectations of default risk. 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 8,200 people and as at April 2015, look after £124.1 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 UK banking operation, Investec Bank plc, looks after £10.3 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.

Fair Investment view

Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “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. Whilst the FTSE continues at what are historically high levels it is understandable why many investors are considering defensive investment plans, and so depending on your view of what will happen to the Index in the medium term, the ability to produce over 5% compound annual growth provided the market does not fall 50% could be a compelling one.”

The plan is open for New ISA investments up to the £15,240 allowance for the current tax year (2015/16) as well as Cash ISA and Stocks & Shares ISA transfers. The minimum investment is £3,000.

Click here for more information about the Investec FTSE 100 Defensive Growth Plan »

 

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

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring or switching 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.

Investor’s Guide to Income

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Last updated: 15/02/2016

The need for income remains firmly at the top of the investor’s New Year priority list and as the hunt for high yield opportunities continues, being able to understand and compare the numerous options available is more important than ever. So what better place to start 2016 than with our Investor’s Guide to Income where we give you an overview of the range of income options on offer, as well as compare some of our most popular investment ideas from last year and their main differences.

Why is income a top priority?

There’s no denying that generating an income is one the most common demands placed on our capital, even more so as low interest rates still appear to be with us for some time to come and there remains a significant question mark around what might happen to inflation in the coming years. Whilst annuity rates also remain comparatively low and many salaries are only just starting to keep up with the real cost of living, it is understandable why income remains a top priority, regardless of our stage in life.

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

Open ended or fixed term?

Open ended

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

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

Fixed term

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

Fixed income versus variable income

Investment funds

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

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

Investment plans

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

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

Monthly or quarterly payments?

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

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

Conditional capital protection versus diversification

Conditional capital protection

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

Diversification

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

Counterparty risk

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

Risk versus reward

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

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

Use your New ISA allowance for tax free income

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

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

Fair Investment conclusion

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

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

In conclusion, whichever route your choose, the market for income investments can be full of attractive headline yields but it is important to fully understand how each investment works and the risks it entails. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remembered that it is the income and capital loss/rise combined that produce your overall return.”

Investment plans

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

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

Fair Investment Fund Supermarket

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

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

 

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

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

Click here to compare UK Equity Income investment funds »

Click here to compare Bond Income investment funds »

 

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

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. Fair Investment Company does not offer advice and any investment transacted through us in on a non-advised basis. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment of ISAs depends on your individual circumstances and legislation which may be subject to change in the future.

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

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

Defensive investment plans revealed – what you need to know

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Defensive plans offer the potential for investment level returns even if the stock market fails to rise, or, in some scenarios, even falls slightly. With the closing levels of the FTSE 100 Index (‘the FTSE’) remaining above 6,000 points for almost the entire period since the start of 2013, defensive plans have risen in popularity as investors who are not confident the markets will rise further still have the opportunity to produce a competitive return on their capital. With this in mind, we take a closer look at a selection of our defensive plans to find out exactly what they have to offer and how the risk versus reward might be appealing in the current investment climate.

FTSE levels

Apart from a handful of days during August and September of this year, the FTSE has closed above 6,000 points since the start of 2013. The lowest level was on 24th August this year when the Index closed at 5,898 points whilst the highest closing level over this period was 7104 towards the end of April this year. This level also represents the highest closing level of the FTSE on record, having broken through the 7,000 point barrier for the first time only in March earlier this year.

What is a defensive plan?

Therefore, by historical standards, the FTSE has spent close to three years at what are historically high levels. Partly as a result of this, there has been an increase in the number of plans that offer the potential for investment returns, even if the event that the market fails to rise. Collectively, these are commonly known as defensive plans.

Different types

Although each plan has its own characteristics, collectively they are growth investments which offer the potential for either a fixed return for every year invested (not compounded), or a multiple in any rise in the underlying investment but starting from a lower initial level (normally with a cap on the maximum growth return on offer).  Each of these investments will be structured to offer a defined return for a defined level of risk, and as such you will know from the outset exactly what must happen in order to receive the stated returns on offer.

A middle ground

Defensive investments therefore try and offer the best of both worlds by offering the potential for investment level returns, even if the underlying investment only rises by a small amount, stays flat, or with some plans even goes down slightly. This means they are designed for investors who have a neutral or negative outlook of what could happen to the stock market in the coming years, and yet who would still like the opportunity to receive the potential for investment level returns. With the FTSE at historically high levels, these could arguably offer a compelling investment opportunity.

Please note that past performance of the FTSE 100 Index is not a guide to its future performance.

Potential for enhanced returns – the defensive ‘supertracker’

The FTSE Defensive Supertracker from Meteor is a current example of the defensive supertracker. 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%, plus your capital back (that’s a 60% return even if the FTSE ends the same).

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%. This investment could therefore offer a compelling risk versus reward for those who are not convinced the FTSE will rise significantly in the medium term. However, if the FTSE has fallen by more than 40%, your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Benefit from early maturity – the defensive kick out

If the FTSE had fallen by 5% in 3 years time and yet you still received 24% growth plus a return of your initial capital, would you consider this a good investment? Our range of defensive kick out plans offer up to 8.0% for each year invested (not compounded), even if the market falls up to 10%. The plans also offer the opportunity to mature early or kick out, as early as year 2 onwards, with different FTSE levels required depending on the individual plan.

The Investec FTSE 100 Defensive Kick-Out Plan will return 8.0% for each year plus a return of your capital provided the level of the FTSE at the end of each year from year 3 onwards, is above 90% of its starting value at the start of the plan. Meteors’ FTSE Defensive Kick Out Plan offers a marginally lower return of 7.75% in the event of kicking out but can mature at the end of year 2 onwards.

If with these plans the FTSE falls below the required level for each year, no growth will be achieved and you initial investment is returned in full unless the Index has fallen by either 40% or 50% (depending on the plan), measured at the end of the plan term. If it has, your capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.

The potential for higher returns

Finally, the potential for higher returns is available if investors are prepared to take a higher level of risk, by having their return dependent on a small number of shares rather than an Index as a whole.  Mariana’s 3 Stock Defensive Consolation Plan offers the potential for 14.5% annual returns, as well as the opportunity to mature early, or ‘kick out’, after 12 months, and then after every six months thereafter.

The plan compares the value of three technology shares (Apple, Microsoft and Intel) at the start of the plan with their values at the end of the first year, and then each six months thereafter. If the values of all three shares are at or above their starting values your investment will end, returning your original capital plus 7.25% for each six months invested (not compounded). If one or more shares are below, the plan continues.

If the plan reaches the end of the six year term without kicking out, it also offers the opportunity for a ‘consolation’ return of 32% provided none of the shares has fallen by more than 50%. If one or more shares have fallen by more than 50% then no return will be paid and your initial capital will be reduced by 1% for each 1% fall of the lowest performing share, so you could lose some or all of your initial investment.

Fair Investment view

Commenting on the plans, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said: “Whilst markets remain at relatively high levels there is understandably a place for defensive investment plans. For those investors who are not confident that the market will rise by a healthy margin in the coming years, knowing that you can achieve 7%+ for each year invested regardless of whether the market goes up, remains flat, or even falls slightly, could be an interesting option.”

He continued: “Combining a competitive growth return with a full return of your initial capital unless the underlying investment falls by 40% or 50% also offers investors a defined return for a defined level of risk. This gives investors the ability to consider the risk versus reward of the plan prior to investing which could be appealing in light of the current investment climate.”

More information on the Meteor FTSE Defensive Supertracker Plan »

More information on the Investec FTSE 100 Defensive Kick Out Plan »

More information on the Meteor FTSE Defensive Kick Out Plan »

More information on the Mariana 3 Stock Defensive Consolation Kick Out Plan »

Click here to compare defensive investment plans »


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

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 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 due to the performance of the FSTE 100 Index or three shares listed on the NASDAQ Index. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In 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 on the NASDAQ is not a guide to their future performance. As share prices can move by a wide margin plans based on the performance of shares represent a higher risk investment than those based on indices as a whole.

Experienced investor income and growth selections

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At Fair Investment Company there are a large number of our investors who decide to invest through us again and again, which is one of the reasons why for the last three years, our experienced investor section has risen in popularity. Whether this is reinvesting investments that have matured, adding new money to their investment portfolio, or a combination of the two, this section has proved popular with both new and existing customers. For this reason we will be bringing you a regular article covering some of the most popular investments featured in the section. Today we start with one income and one growth selection.

A wider range of investment selections

Designed to complement our range of savings and investment ideas, our experienced investor section was created to enhance our overall offering by featuring a wider range of innovative investment products. Aimed at both existing investors and those new to Fair Investment, the section is aimed at making it easier for you to find and compare the latest income and growth investment opportunities, whilst also giving you plenty of investment ideas and product selections to help you identify whether they meet your needs.

Fixed term investments

Many of our investors decide that an investment with a fixed term is the right way forward, which is why our most popular type of investment is the structured investment plan. These plans offer a defined return for a defined level of risk, thereby offering a more predetermined level of risk versus reward than many other types of investment.

Investment selections

Listed in the experienced investor section is our selection of plans whose performance will depend on a wider range of underlying investments, be this indices from the US or Europe as well as the UK, a blend of more than one index or perhaps a specific number of stocks targeted at a benchmark or sector.

Risk versus reward

As such the knowledge and experience required to review their risk versus reward and their potential as an investment opportunity is considered higher than for some of our other investment plans. Therefore these would not be appropriate for someone new to this type of product or new to investing, but rather are designed for customers who have already invested in a similar product or who fully understand and have experience of putting their capital at risk.

Who is an experienced investor?

Since Fair Investment does not give advice, we feel there are certain investments which should only be considered if this knowledge and experience can be established and although there are no formal set criteria, the following are examples of someone who might be considered an experienced investor:

  1. An existing customer who has invested in a capital at risk product
  2. A new customer who has, in the last 5 years, held a capital at risk investment
  3. A new customer who has, in the last 5 years, held a structured product

Since an assessment of appropriateness forms part of our application process, all investors into any of the plans listed in this section will need to show that they have the necessary knowledge and experience by confirming they fit into one of the above or similar and we may need to obtain further details from you in order to confirm this.

Latest selections

With the potential for double digit growth returns and high income yields, this section is aimed at more experienced investors who are looking for a wider selection of top income and growth ideas and who are prepared to take a higher level of risk. Here we take a look at two of our current selections, one income and one growth.

Income selection

Mariana FTSE S&P Range Income Plan

The Mariana FSTE S&P Range Income Plan offers up to 7.50% each year based on the performance of the FTSE 100 Index and the S&P 500 Index (made up of 500 of the largest companies in the US). Each Index is measured at the start of the plan, and then again at the end of each quarter. If both Indices are within the range of 70% and 130% of their starting level (i.e. they can fall or rise by up to 30%), a 1.875% income payment is made. If either index is outside of this range, no payment is made for that quarter.

The plan also offers some capital protection against the UK and US markets falling since your initial investment is returned in full unless one or both indices falls by 40% or more, measured at the end of the fixed term only. If this does occur, your capital will be reduced by 1% for each 1% fall of the worst performing index, so you could lose some or all of your initial investment.

Fair Investment view: “If you are looking for a high level of income and do not think either the UK or US markets will rise or fall by more than 30% over the medium term, this plan could be a timely opportunity whilst the quarterly payment frequency is likely to appeal to most income seekers. There are few investments out there offering up to 7.50% income whilst the 40% barrier for both indices offers investors some capital protection against falling markets.”

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Growth selection

Meteor Dual index Kick Start Plan

The Dual Index Kick Start Plan from Meteor is a fixed term investment that will mature early or ‘kick out’ at the end of each year, depending on the performance of the FTSE 100 Index and the EURO STOXX 50 Index (made up of the 50 leading blue chip companies in the Eurozone). If the values of both indices at the end of each year are at or above their values at the start of the plan, investors will receive 13.25% at the end of year one, or 13.25% plus an additional 10% for each year thereafter (not compounded).

If one or both Indices close below the required level each year, no growth return will be paid and your initial investment will be returned in full unless one or both Indices has fallen by more than 40% at the end of the plan. If it has, your initial capital would be reduced by 1% for each 1% fall of the worst performing Index, so you could lose some or all of your investment.

Fair Investment view: “Investors in search of the potential for high returns may find the opportunity for 13.25% growth after just 12 months along with a full return of capital, to be a compelling one. Depending on your view of the UK and European markets, an investment that offers the potential for such high growth returns even if the markets stay relatively flat, could be worth a closer look.”

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Keep visiting for the latest plans

Changes to stock market conditions bring with them new investment trends and opportunities. Structured investment plans can often be well placed to capture some of these opportunities and so there are a regular flow of new investment ideas on offer and we make regularly changes to the investment plans listed in the section. These plans are normally only available for between four to six weeks and since they can be very popular, some do close early because they have been oversubscribed. Therefore keep visiting in order to seek out the latest offers.

Visit the Experienced Investor section »

 

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

The plans detailed in this article are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Growth on your investment is 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, the EURO STOXX 50 Index and the S&P 500 are not a guide to their future performance.

Top 10 reasons to consider Kick Out investment plans now

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Last updated: 10/11/2015

Whilst the stock market remains as volatile as ever, there is one type of investment plan that continues to be a popular choice with our investors. Kick out plans offer a defined return for a defined level of risk, which combined with the opportunity to mature early seems to make them particularly sought after in the current climate. Whilst many investors find it harder to commit when markets are seemingly more unpredictable than normal, we have seen a recent increase in the number of new investments into this type of plan and since they are available as a capital protected deposit or a capital at risk investment, have become popular with both savers and investors. With this in mind, we give you our Top 10 reasons to consider a kick out plan.

Defined return, defined risk

With kick out plans the potential returns on offer as well as what needs to happen to provide these returns is known up front, before you commit your capital – a defined return for a defined level of risk. The investor therefore has the benefit of knowing at the outset the conditions that need to be met in order to provide the stated returns. This can be used to make an informed decision about whether to invest or not.

Early maturity

These plans have a maximum fixed term or normally six years, but the term ‘kick out’ refers to their ability to mature early depending on the movement of the underlying investment, such as the FTSE 100 Index. Plans that have the ability to mature early thereby providing an attractive level of growth along with a full return of your initial capital have proved popular with investors in all types of markets.

Potential for high returns

In addition to the opportunity for early maturity it is no doubt the potential for high growth returns that contribute to the ongoing popularity of kick out plans. With a number of plans offering the potential for double digit returns for each year invested (not compounded), the opportunity can be a compelling one, especially since what has to happen to the markets in order to provide these returns is known at outset.

Return on investment even if the market stays flat

A small number of plans offer returns only if the market goes up slightly but the majority offer the potential for a competitive growth return (up to 10.0%) even if the stock market stays the same. So if you’re not convinced the markets will rise in the future and yet still wish to achieve stock market level returns, this could be a compelling investment story and is perhaps why this type of investment has proved particularly popular while the FTSE still remains at what are historically high levels.

Click here to compare kick out investment plans »

Potential to beat the market

Should a kick out plan be designed to mature early provided the level of the FTSE 100 Index (or other underlying investment) at the end of each year is higher than its value at the start of the plan, then provided the Index has gone up, even if this is by a small amount, you will receive the headline return along with a full repayment of your initial capital. If the stock market had only risen by a very small amount then it is likely that this type of investment would have outperformed the market.

Investment level returns even if the market falls slightly

There are also kick out plans that will provide competitive growth returns even if the underlying investment falls slightly, for example up to 10% or 15%. These so called ‘defensive’ kick out plans thereby cater for a wider range of investor views as to what could happen to the stock market in the coming years. With current plans offering the potential for double digit returns, and whilst the FTSE has remained at historically high levels, this has proved to be a popular feature.

Click here to compare defensive kick out investment plans »

Some capital protection from a falling market

Your original capital is returned if the plan kicks out but should this not occur, typically your capital will be returned provided the underlying investment has not fallen below a certain amount, which is normally a percentage of its value at the start of the plan. To put this into context, for a plan which offers a return of capital unless the FTSE falls by more than 50%, then based on this morning’s opening value of 5,958.9, the Index would have to fall to a closing level of 2,979.5 before your capital would be at risk, a level not seen since 1995. However, if it does fall below 50% you could lose some or all of your initial capital. Please also remember that past performance is not a guide to future performance.

Fully capital protected options

Some kick out plans are also available with full capital protection, known as structured deposits. These therefore offer the potential for returns which are higher than those currently available from the more traditional fixed rate bond as well as Financial Services Compensation Scheme eligibility up to the prevailing deposit limits (currently £85,000 per individual per institution, reducing to £75,000 from 1st January 2016 onwards). However, it should be remembered that unlike fixed rate bonds the returns on these are not guaranteed.

Click here to compare capital protected kick out plans »

No annual management charges

Unlike investment funds, the charges for creating and managing kick out plans are already taken into account so there are no annual management charges which come out of the headline return. The costs associated with the management of funds happens each and every year (in both actively managed and tracker funds), which may help to explain the number of funds which fail to outperform the FTSE 100 Index or other benchmark, especially over a five or six year period. This ongoing cost is not a feature of kick out plans. Most kick out investments will though have an initial charge, normally up to a maximum of 3%.

Tax efficient – New ISA friendly

In addition to non-ISA investments, all of the kick out plans offered through Fair Investment Company are available to individuals as a New ISA up to the current limit of £15,240 (2015/16 tax year) and will also accept transfers from both Cash ISAs and Stocks & Shares ISAs. Please note that the tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future.

Understand counterparty risk

One of the main differences with structured investment plans when compared with other types of investments, such as funds or investment trusts, is that your capital is used to purchase securities and it is these securities which are designed to produce the stated returns on offer. These securities are normally issued by a bank which means that your investment is held with a single institution rather than split between a number of companies, as it would be within an investment fund. This means the risk of the bank becoming insolvent and therefore unable to repay your original investment along with any stated returns becomes a factor to consider – this is known as counterparty risk. Since the counterparty is usually a bank, the credit rating is normally available so a view can be taken on the potential risk involved. There are also plans which aim to reduce this counterparty risk by spreading it across a number of institutions.

Fair Investment view

Commenting on kick outs as a potential plan to consider, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With markets continuing to make investors think very carefully before committing their capital, kick out plans have proved to be a popular choice by offering an often compelling balance of risk versus reward”.

He continued: “Although they should be considered fixed term plans, the opportunity to mature early, sometimes in as little as 12 months, is clearly an appealing feature for both savers and investors. Combined with the potential for high investment returns, even if the market stays relatively flat or in some cases even goes down, and it is understandable why this type of investment could be seen as an attractive opportunity in any investment climate, but especially when markets continue to trade at historically high levels.”

Latest selections

Kick out investment plans offer the potential for high returns balanced with conditional capital protection, with our latest selections offering a wide range of counterparties, collateralised versions as well as ‘defensive’ plans giving investors plenty of choice. We also have a number of kick out investments for our existing customers and those more experienced investors where you will find a range of dual Index plans which offer a higher risk versus reward, with current headline returns of up to 15% after 12 months.

Click here for the latest kick out investments »

Click here for the latest defensive kick out investments »

Click here for the latest kick out deposit plans »

Click here for our experienced investor section »

 

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

Tax treatment depends on your individual circumstances and may change. Make sure you check whether any charges apply prior to transferring any existing investment.

Although structured deposit plans are capital protected there is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial 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.

Kick out investment plans 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. The past performance of the FTSE 100 Index is not a guide to their future performance.