The need to get the most from our savings and investments is higher now than ever before. We therefore take a look at some of our income selections, for both capital protected savings as well as the potential for higher income yields on offer if you put your capital at risk.
The need for income
One of the most common questions we get asked by those interested in our savings and investment options concerns the income yield on offer. Low interest rates, especially in the longer term, as well as the prospect of rising inflation, contribute to the general uncertainty about what lies around the corner and puts a real focus on what income is available.
The economic backdrop is clearly a challenge, with many savers and investors committing to tie their money up without fully getting to grips with the impact the future could have on their overall returns.
One of the most important considerations before making any savings or investment decision is to understand the potential impact of inflation. In combination with our own tax treatment and the effect of any charges on our returns, this can have a significant effect on the most important reason for parting with our hard earned cash – the return we get in our pocket or the ‘net return’.
4% fixed per annum may look like a competitive rate, but if inflation is running at 2.6% and you are at least a basic rate tax payer, your net return is only 0.75% each year at the most - not so great after all and the longer you commit to, the more pronounced the impact over time.
Where to start
Perhaps the most important consideration and one which should be considered first is whether you wish to expose your capital to risk or whether a return of at least your original deposit is your top priority. The principle of risk v reward translates to the higher returns only becoming available by moving up the risk ladder although it should be noted that investment risk is subjective and covers a very broad spectrum.
If you are looking for the potential for higher returns from your savings then you must be prepared to tie up your money since there is also no increased reward without increased risk. The risk here is that inflation could erode the value of your savings or that a better interest rate becomes available in the future but you are tied in and so unable to change without penalty or potential loss of capital.
When looking for income solutions, the more competitive capital protected options usually equate to longer terms being necessary. However, this must also be considered in the context of the current economic climate, and in particular the effect future inflation can have on the real value of your money.
The current economic environment plus the record low interest rates currently available from longer term fixed rate bonds continues to cause a real dilemma for savers. This has led many to consider a wider range of options, sometimes with a view to blending with the more traditional fixed rate savings option.
Replacing a fixed rate with the potential for a higher return
The UK Range 7 Deposit Plan from Societe Generale is a brand new deposit which offers the potential to return 7% each year (gross) provided the FTSE remains between an upper and lower range based on its level at the start of the plan. This range increases each year, starting at +/- 15% in year one, and then increasing by +/- 5% each year to finish at a range of +/- 40% in the final year.
The potential yield of 7% per year is a return more commonly associated with equities and fund investments rather than capital protected options. The trade-off is that the income is not guaranteed and for any year where the FTSE falls outside of the range, no income is paid for that year.
By linking your income to the performance of the FTSE you replace a fixed return with the opportunity for a potential premium over leading longer term fixed rates of more than 3% each year and in the current climate, this is an attractive headline.
The potential for even higher returns
For those prepared to accept some risk to capital, there is a wider range of options available and this is where the higher potential rates of return could be achieved, which in turn could combat any future rise to inflation.
Our selection of investment plans offers a defined return for a defined level of risk. The benefit here is that you know from the outset exactly what has to happen in order to achieve the stated returns.
Our most popular income investment is the Bonus Income Plan from Investec. One of the features which sets the Bonus Income Plan apart from many other investments is that it pays a fixed income, giving you the peace of mind that you will receive 6.84% each year whatever happens to the stock market.
However, should the FTSE 100 be higher than its starting value at the end of each month, you will also receive a bonus, equivalent to 0.48% each year, thereby offering a total income of up 7.32% gross.
This investment also includes conditional capital protection which means your capital is at risk if the value of the FTSE falls below 50% of its starting value during the investment and also finishes below its starting value at the end of the 5 year term.
For those who wish to spread the credit risk associated with the investment, there is also a UK 5 Banks option which spreads this risk across five well known financial institutions. This version is currently offering 5.64% as well as the potential 0.48% annual bonus.
Alternative options - income yields of up to 7.2%
Another popular choice with investors at the moment is the Income Builder Plus from Gilliat. This plan accrues income weekly and pays it out each quarter, with the level of income dependent on the FTSE 100 remaining above a certain level.
You decide which FTSE level you are most comfortable with and there are two choices - either 3,500 or 4000 points. The maximum income you can receive is 7.2% gross per year (1.8% per quarter) if you choose the 4,000 point barrier and 6.36% gross per year (1.59% per quarter) if you go with the 3,500 barrier. As the level of income is accrued weekly, even if the FTSE does drop below this level, you could still receive a lower level of income.
Again, each investment contains conditional capital protection which means that provided the level of the FTSE is not below the same barrier used for the income (i.e. either 3,500 or 4,000 points), then your original investment will be returned in full. This is only measured on the last day of the investment term and if it is below the barrier, your initial capital will be reduced as if it had been invested in the Index (i.e. by 1% for each 1% fall).
Tax-free income - use your ISA allowance or transfer existing funds
Remember that the above returns on offer are gross, i.e. before tax is taken into account. With the lowest marginal rate at 20%, this is a sizeable reduction to any stated returns on offer.
The sound of tax-free income is an attractive one and the benefit of using your ISA allowance is that any income is paid without deduction of tax and is not then subject to tax. All of the plans detailed above are eligible for new ISA investments (Cash ISA for capital protected and Investment ISA for capital at risk) and will also accept existing ISA transfers.
Tax treatment depends on your individual circumstances and may be subject to change in the future.
Consider your options carefully
With the current economy making any decision around what to do with our savings and investments a difficult one, in our search for the best income solution we would do well to make sure we review all of the options open to us.
With such a range of competitive options available, it is wise to consider each option carefully.
Compare our Capital protected income plans »
Compare our Income 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.
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.
Some structured investment plans are not capital protected and there may be the 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 which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested 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.
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