Income continues to be at the forefront of investors' minds, even more so due to the significant reduction in yields on savings available from longer term fixed rates. The Bonus Income Plan from Investec has been consistently popular with income investors, and so we take a closer look to see what has driven this demand and why it is now in its 27th issue.
In a nutshell
The Bonus Income Plan is one of the most popular income investments with our customers and is showing no signs of losing what is a consistent and growing demand. The current version offers the investor a fixed income of 6.84% (gross) each year, along with the potential for an additional 0.5% bonus for each year the FTSE 100 (the FTSE) finishes higher than its value at the start of the investment.
Your capital is at risk should the FTSE fall below 50% of its starting value on any closing date throughout the investment term as well as finishing below the starting value. This is known as conditional capital protection and is one of the main differentiators from other types of income investments.
Fixed income, paid monthly
Although the name highlights the bonus element of this income investment, this is not the main reason for its popularity. Indeed, one of the most attractive features is the fact that 6.84% (gross) per year is fixed rather than being dependent on the performance of the FTSE. This means that the investor has the certainty of knowing at the outset exactly how much he will receive each and every year.
Another popular feature is the monthly payment frequency since this is the most useful in terms of budgeting, especially when many investment funds only offer twice yearly or quarterly payments. Therefore, not only does the investment provide a high level of fixed income, but it also pays this on a monthly basis which could be attractive when looking to supplement existing income.
The Bonus Income Plan has a five year fixed term and early withdrawal could result in you getting back less than you invested. Although you do have the option to withdraw your money early and in this respect it is not dissimilar to investment funds, the plan is designed to be held for the full term and the daily liquidity of investment funds makes them easier to switch.
However, the fixed term will appeal to those who wish to plan around this and, combined with a fixed return, this gives a full and accurate picture of what the coming years will yield.
Conditional capital protection
When considering investment options it is important to understand the balance of risk v reward. Inevitably, the opportunity to receive higher returns than might be available from cash deposits requires the investor to put their capital at risk.
The Bonus Income Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional on the FTSE 100 not falling by more than 50% of its starting value. If the FTSE stays within this 50% barrier throughout your investment then you will receive a full return of your original investment but if it does not, and also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE.
Credit ratings and agencies
Unlike a fund, some of your investment is used to purchase securities issued by Investec Bank plc and so their ability to meet financial obligations becomes an important consideration. Fitch is one of main global credit rating agencies and as at the time of writing, Investec Bank plc has a credit rating of BBB- with a negative outlook.
The ‘BBB’ rating denotes an adequate capacity for payment of financial commitments although adverse business or economic conditions are more likely to impair this capacity, with the ‘-‘ signifying it is at the lower end of this rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term, i.e. in the next 6 months to 2 years.
For those who wish to mitigate the credit risk within the investment, Investec offer a UK 5 Option which spreads the counterparty risk between 5 institutions equally (HSBC, Nationwide, Santander, The Royal Bank of Scotland and Lloyds TSB). This version offers a fixed income of 5.64% (gross) per year with the same potential annual bonus of 0.5%.
Investec Bank plc
Investec is a specialist bank and asset manager with its main operations in the UK and South Africa. They look after £96.8 billion of customer assets as well as a further £25.3 billion of customer deposits and employ around 6,700 people. They specialise in a number of areas, particularly within the banking sector, and are a leading provider of investment plans and structured deposits.
One final feature which has received positive customer feedback is the tax treatment of your investment. Outside of an ISA, the fixed annual return you receive is treated as a return of capital so is paid to you gross and there is no immediate tax liability. The potential bonus payment will be subject to income tax and will have 20% deducted at source.
At the end of the investment the total payouts received during the term are added to the amount of capital you receive back (which is dependent on the performance of the FTSE) with the combined amount being subject to Capital Gains Tax (CGT). There is an annual CGT exemption (£10,600 for the 2012/13 tax year) which can be utilised to reduce or eliminate the tax payable, depending on your individual circumstances.
This is a clear differentiator to investments which are subject to income tax. Please note that this information is based on current law and practice which may change at any time.
Risk v reward
Low interest rates certainly look here to stay, with some economic forecasts suggesting we are unlikely to see a rate rise for at least another five years. With the market for longer term fixed rates declining in recent months, the ongoing need for higher income is simply not being met.
The principle of risk v reward means that the search for potentially higher returns leads to the need to put your capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe and then consider whether you are comfortable with the risk you are taking in order to receive the potentially higher return.
Our best five year fixed rate deposit is currently offering 3.71% and so by accepting risk to your capital, you are potentially increasing your annual return by just over 3% a year, excluding the additional 0.5% bonus on offer.
Fair Investment conclusion
The market for income investments is full of attractive 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.
Commenting on the Bonus Income Plan from Investec, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company, said: “In the final analysis, the high level of fixed income and monthly payment frequency makes for a competitive investment. The potential for an additional bonus gives a high headline yield and the combination of conditional capital protection gives an attractive overall balance of risk v reward.”
The plan is open for direct investments, ISAs and ISA transfers.
Click for more information about the Investec Bonus Income Plan »
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment depends on your individual circumstances and may change.
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.
© Fair Investment Company Limited