As we move into August, we take a look at our five most popular investment plans since British summer officially started on 21st June. This has already been a busy summer, with a growing number of competitive income and growth plans on offer. As you might expect, with savings rates continuing at uninspiring levels and many savers inevitably looking to take on more risk in the hunt for higher returns, income investments feature heavily in this, the first of a two part feature of our summer’s most popular plans.
1. 10% per year, even if the FTSE stays flat
With the potential for the double digit returns and the opportunity to mature early from year one onwards, the Investec Enhanced Kick Out Plan has been one of our best selling kick out plans and this summer is no exception. The plan continues to be a top performer, and will return 10% per year (not compounded) provided the value of the FTSE 100 Index at the end of each year (from year 1 onwards) is higher than its value at the start of the plan – so although the Index does have to rise, this only needs to be by a single point. Your initial capital is at risk if the Index falls by more than 50% during the term and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall.
Fair Investment view: “Knowing how to invest when the FTSE is high continues to be a challenge for investors, but the potential for high returns as early as year 1, even if the FTSE only rises by a single point, perhaps helps to explain why this is our best selling plan with both growth investors and those looking for New ISA investment ideas. We’ve not been able to talk about the potential for double digit returns for a while, so if the combination of high growth returns, the ability to mature early, as well as some capital protection against a falling market sounds appealing, this might make for a compelling opportunity in the current investment climate.”
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2. 7.32% p.a. fixed income, monthly payments
The Meteor 4 Year Income Plan is the first fixed income plan to feature in our summer’s hot list and offers 7.32% annual income (paid as 0.61% each month). One of the main reasons for the high level of fixed income is that the return of your initial capital is dependent on the performance of four FTSE 100 shares rather the Index as a whole. Should the value of the lowest performing share be less than 50% of its value 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.
Fair Investment view: “If you invest within an ISA, the 7.32% fixed income is equivalent to 9.15% p.a. for basic rate tax payers and 12.20% p.a. for higher rate tax payers. The four year term and the monthly fixed income on offer may well appeal to income investors but you should also consider that there is a higher risk to your capital than an investment based on the performance of the FTSE 100 Index.”
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Income investments are some of our most commonly requested investment plans – whether it’s investors who want to use their ISA allowance to receive income, or people transferring existing investments in the quest for higher returns. If you are looking for a high level of fixed income and want to know exactly how much you will paid, when, and for how long, the 4 Year FTSE 4 Monthly Income Plan could offer a compelling investment opportunity.
Savers and investors face contrasting fortunes
Income is without doubt the most common demand put on our capital and this requirement commonly increases the older we get. As we start to reduce our working hours or look towards retirement, the objective of finding a competitive income stream from our investments becomes increasingly important. As we continue to face income pressure from sustained low interest rates and with future uncertainty around what the recently record-breaking FTSE might yield in the coming years, the balance of risk versus reward on offer from this plan is certainly worth a closer look.
In a nutshell
The Meteor 4 Year FTSE 4 Monthly Income Plan pays a fixed income of 7.32% each year, with monthly payments of 0.61% paid to you regardless of what happens to the stock market. The risk is that the return of your capital at the end of the four year term is based on the performance of four FTSE 100 shares – Rio Tinto plc, International Consolidated Airlines Group, Pearson plc and Aviva plc. If the value of the lowest performing share is less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall. You could therefore lose some or all of your initial investment. The four year term and the monthly fixed income on offer may well appeal to income investors but you should also consider that there is a higher risk to your capital than an investment based on the performance of the FTSE 100 Index.
Fixed income investments have risen in popularity year on year as more and more investors seek out new ways to generate a predictable and regular income from their capital. This popularity increases none more so than at this time of year, when the additional feature of receiving income tax free when holding your investment plan within an ISA is another reason to consider your options. So with ISA season upon us, and whilst savings rates continue to force many to consider taking on more risk with their capital, we take a look at what fixed income investments can offer and how to compare the latest plans available.
The here and now
Not only have fixed income investments been one of the real success stories in recent years having seen a significant surge of interest since the stock market crash of 2008/9, but this interest seems to be increasing as the needs and demands put on more of us from our capital fails to be met by traditional products, which often have variable and less predictable income.
Savings rates have also fallen dramatically over the same period with top five year fixed rate bonds currently paying around 3.0%, whilst fixed rate Cash ISAs are much lower at around 2.4%. So fixed term deposits are failing to deliver the returns so many cash savers had grown used to, causing many to consider having to take on more risk with some of their capital.
What is a fixed income investment plan?
The fixed income investment, or reverse convertible to give it its technical name, is a fixed term investment where the level of income received is fixed at the outset and is paid to you regardless of the performance of any specific shares or the stock market as a whole. The return of your initial investment is however determined by the stock market, which in usually based on the performance of a major stock market index such as the FTSE 100 (the Index) or a number of shares listed on the Index.
Because the income is not reliant on the performance of the stock market, investors have the benefit of knowing at the outset exactly how much income they will receive and when it will be paid. This certainty of income and timing is undoubtedly playing a key role in their popularity.
Fixed income, fixed term
Not only is the income fixed, but the term of the plan is also. The plan term is normally in the region of five to six years, thereby providing a defined period during which your capital is invested. This combination of a pre-determined fixed income paid over a fixed term creates an investment that is relatively straightforward to understand and which is more easily comparable to other income investments available in the market.
This contrasts with investing directly in shares or a UK equity income fund where in addition to your capital being exposed to daily stock market fluctuations, in both cases your income is variable and not necessarily predictable. Fixed income investments therefore offer a unique set of investment features when compared to more traditional income investments.