With the current economic environment asking savers far more questions than it gives answers, it is good to know that there are alternatives available. We take a look at one such alternative that is proving particularly popular as savers face the harsh reality that the more traditional fixed rate savings products are failing to meet their needs.
The bottom line
The prevailing economic conditions are some of the most challenging ever seen - Bank of England base rate continuing at 0.5%, record low savings rates, maturing fixed rate bondholders facing yields falling by half on similar termed products, limited prospect of savings rates going up in the near future and to top it all off above target inflation.
The picture is worryingly all too familiar and the bottom line is that everyone is affected, but it is perhaps the saver who is feeling it most in the search for a competitive return from their capital. Whether they are looking to achieve capital growth and fight the affects of inflation, or to provide a valuable supplement to their income, savers have nowhere to hide.
Fixed rates underperforming
Gone are the days where committing your money for longer was all you needed to secure a higher rate that also had the potential to outstrip inflation. Peace of mind along with a competitive deal have vanished completely and with the prevailing wind of economic consensus that interest rates will remain low for some time, this bleak outlook has forced savers to give it their urgent attention.
Even with the headline rate of inflation falling back from 2.8% to 2.7% in August, inflation is still a major concern for savers. At this level, all but non-taxpayers require an annual rate of 3.4% just to stand still. With leading five year fixed rates only offering around 3%, even committing your capital for longer is failing to provide a hedge against inflation. So savers are faced with the toughest of decisions, either lose money in real terms from a savings account, or take on more risk.
Potential income yield of 5.15%
This is where the potential to beat cash returns but also maintaining the safety net of capital protection could bridge the gap, and the Target Income Deposit Plan from Investec offers the potential to do exactly that.
The plan protects your initial deposit while aiming to provide an annual income of 5.15% - a potential return that is well above the rates currently available on other savings products and is equally competitive when compared to the highest yields available from income investments.
Returns not guaranteed
The difference between traditional fixed rates and this plan is that your income is not guaranteed but rather payment of the headline rate of return is dependent on the performance of the FTSE 100 Index. Provided the value of the FTSE at the end of each year is higher than 90% of its value at the start of the plan, you receive a fixed payment of 5.15%. If it is below this level, you do not receive a payment and your plan continues.
Another attractive feature of the plan is the memory feature. Should the value of the Index be below 90% at the end of each year, no interest payment will be made. However, the plan also contains a memory feature which means that should the Index meet the required level at any future anniversary during the term, any missed payments are added to the payment for that year.
High potential returns even if the market falls up to 10%
The fact that the income payment is made even if the FTSE has fallen up to 10% offers a defensive element to the deposit since you could still receive a competitive return even if the market falls slightly. This caters for those who are not confident the FTSE will remain flat or continue to rise over the medium term.
As the plan is a structured deposit you will receive your initial deposit back in full after the six year term, regardless of what happens to the FTSE 100 Index and as long as the deposit taker for the plan, Investec Bank Plc, is able to repay your money. The bank’s ability to stay solvent and repay your capital is known as counterparty risk and is the same risk you take with any capital deposited with an institution with a UK banking licence.
In the event that Investec is unable to meet its liabilities, the plan would come under the remit of the Financial Services Compensation Scheme deposit protection. This means savers could be eligible for compensation from the scheme for up to £85,000 per person if Investec Bank was unable to return the capital invested to savers.
Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, as at April 2013 they look after £96.8 billion of customer assets as well as a further £25.3 billion of customer deposits and employ around 7,300 people. They specialise in a number of areas, particularly within the banking sector and are a leading provider of investment plans and structured deposits.
Initial index level and averages
The initial index level of the FTSE 100 is taken on 25th November 2013 and this is used to compare the value of the index at the end of each year of the plan. The Index value at each anniversary is calculated as the average of the FTSE 100 Index on the anniversary and the four preceding business days (i.e. the average of five business days when the FTSE is trading).
The use of averaging can reduce the adverse effects of a falling market or sudden market falls shortly before each anniversary. Equally, if can reduce the benefits of an increasing market or sudden markets rises shortly before an anniversary.
Risk versus reward
The principle of risk v reward means that the search for potentially higher returns inevitably leads to taking on more risk and the principle risk with this deposit compared to traditional fixed rate bonds is that your return is not guaranteed, rather is it dependent on the performance of the stock market.
The reward for removing a fixed income is the potential for a higher income than is currently available from a fixed rate bond of similar duration. With longer term fixed rates now only offering around 3%, the decision is therefore whether you are prepared to sacrifice a fixed payment in return for a potential income which is over 2% higher, with the memory feature adding the potential to recoup any missed income payments.
Head of savings and investments at Fair Investment Company, Oliver Roylance-Smith commented: “Looking at the leading interest rates currently available from fixed rate bonds compared to a few years ago, it is understandable why the potential for a headline return of 5.15% might appeal and this latest version of the Target Income Deposit Plan offers the highest headline return yet since the product launched at the start of the year.“
He continued: “This makes it one of the most competitive alternatives to traditional fixed rates currently available for those in the hunt for income, offering the potential for a return over and above the current rate of inflation. This potential return also sits alongside the capital protection offered by a structured deposit plan, allowing both savers and investors the opportunity for high returns but without risking their capital.”
The plan is open for current year Cash-ISAs, Cash-ISA transfers and non-ISA deposits, as well as to businesses, charities and trusts.
For more information about the Investec Target Income Deposit Plan, click here »
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 plan referred to in this article is a structured deposit plan that is capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial capital and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial deposit if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.
© Fair Investment Company Limited