By combining a high fixed income with conditional capital protection, the Enhanced Income Plan from Investec Bank has been our most popular income investment. With the need for income being at the forefront of every saver and investor alike, we take a detailed look at why this investment plan has proved to be a consistent best seller.
Income needs high on the agenda
Although investing in the FTSE over the last 12 months will have been a rewarding experience, meeting income needs still remains a challenge and the economic outlook over the medium term creates an increased demand on the overall returns from our capital.
Income is the most consistent of all the investment themes, whether you are working and need to supplement your earnings or retired and looking to add to your pension income, but unfortunately the current economic environment is proving to be one of the most challenging ever seen.
With low interest rates set to continue, volatile bond yields and increasing uncertainty as to what the next few years could hold in terms of the UK stock market, these are challenging times. Throw in the possibility of inflationary pressures rearing their ugly head and the income demands on our capital remain high on the agenda.
Fixed or variable income?
Whilst many traditional income investments offer a variable income and put your capital fully at risk, the Enhanced Income Plan combines a fixed income with conditional capital protection. The plan thereby offers a defined return for a defined level of risk, which is perhaps one of the features that helps explain this investment’s popularity.
In a nutshell
The Enhanced Income Plan is a relatively simple plan to understand. The current version offers investors a fixed income of 5.76% each year and your investment has a fixed term of six years. Your capital is at risk should the FTSE 100 (‘the FTSE’) fall below 50% of it’s starting value on any closing date throughout the investment term as well as finishes below the starting value. This is known as conditional capital protection and is one of the plan’s main differentiators from other types of income investments.
The plan offers a high level of income but one of the most attractive features of this investment is the fact that the 5.76% per year is fixed rather than being dependent on the stock market. 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 is attractive when looking to supplement existing income.
The Enhanced Income Plan has a six year fixed term and although you do have the option to withdraw your money early and in this respect is not dissimilar to investment funds, the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested.
The fixed term will though 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. With many economists predicting that we may not see an interest rate rise until mid 2017, this could be seen as a viable option.
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 Enhanced Income Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional on the FTSE 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 the index also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE. Therefore, there is a risk that you could lose some or all of your capital.
Compared to investment funds
Some of the yields available from investment funds certainly catch the eye but it is important to remember that this income is not guaranteed and is subject to fluctuations. In addition, the treatment of your capital is different to the Investec plan in that there is no conditional capital protection – your capital is fully at risk on a daily basis.
This is important since the income yield and any rise or fall to your original capital should always be considered together since both have an effect on your overall return. For example a 9% income yield is compelling in its own right but not so if it coincides with a 9% reduction in the value of your capital. However, this can of course work in your favour if capital growth is positive.
Compared to cash
Although this plan puts your capital at risk and is therefore not capital protected, since this investment offers a fixed income over a fixed period, it is relatively easy to compare those elements with cash and a guaranteed return (subject to deposit taker liquidity) that you would receive from a fixed rate bond of similar duration.
Although there is not a market for six year fixed rate bonds there has historically been a healthy market for longer term fixed rates with five year fixed rates traditionally offering the higher returns as compensation for you committing your capital for longer. Unfortunately the market here has been steadily declining.
Risk v reward
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.
Leading five year fixed rates are currently offering around 3.0% and so by accepting risk to your capital, you are increasing your fixed return by almost 2.76% a year (since the fixed income from this investment is 5.76%). With the market failing to meet the need for higher income the decision is whether you are comfortable with the conditional capital protection offered in order to achieve an uplift on your investment and the potential to protect your income from the effects of inflation.
Credit ratings and agencies
Unlike a fund, 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 30th November 2011, 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.
Investec Bank plc
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.
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 Enhanced Income Plan from Investec, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “The high level of fixed income, monthly payment frequency and fixed term provides a level of certainty and makes for an attractive investment. With low interest rates and real uncertainties around future inflation, this plan provides a competitive balance of risk versus reward that could be considered by both savers and investors.”
The plan is open for direct investments, ISAs and ISA transfers.
Click for more information about the Investec Enhanced 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