Investments vs Inflation Go compare with our comparison table

Investments vs Inflation

29 November 2011 / by Oliver Roylance-Smith

Amid so much uncertainty of inflation's future, we review the current range of structured investments and see how their returns stack up against the rising cost of living.

Future uncertainty

Earlier this month we asked what will happen to inflation? and talked about how the Bank of England’s Monetary Policy Committee (MPC) again held firm with the base rate at 0.5%, continuing the record low for the 32nd consecutive month. Our conclusion was that any short term reductions could well be the calm before the storm. The current domestic and economic environment offers nothing to get our hopes up when looking beyond the next 12 months and there seems to be increasing agreement that inflation will rise again in the medium to longer term, and by worrying levels according to some estimates.

The latest Systematic Risk Survey by the Bank of England revealed that the UK is at the greatest risk of a financial collapse since Lehman Brothers and the MPC itself expressed ‘substantial uncertainties’ over the path of inflation. With cuts to growth forecasts for UK GDP and the FTSE down nearly 7% over the last couple of weeks, the overall picture does not inspire us with confidence, although the decline in the FTSE could also be seen as an opportunity.

Forecasts of short term reductions in inflation need to be put into context. Few investors should focus on the short term when it is the longer term impact of inflation which causes the most damage. So it is against this backdrop that the various structured investment options need to be compared.

Weighing up the risks

Capital is at risk with these plans and normally this is in the event of the FTSE falling by more than 50%. Although this is of course a possibility, at the time of writing the FTSE has been around the 5,200 mark and so would need to drop to below 2,600, a level not seen since 1992. This needs to be weighed up against the potential upside, whether this is in the form of capital growth or income.

Income seeking

With inflation currently at 5%, a basic rate taxpayer has to achieve a return of 6.25% just to keep pace. Investec’s Bonus Income Plan pays a fixed return of 6.75% per year, with a potential 0.5% annual bonus, whilst Gilliat’s Income Builder offers the opportunity to receive up to 8.1% per year provided the FTSE remains above 3,000.

Both plans put your capital at risk – Investec if the FTSE falls by 50% (equivalent to 2,570 based on today’s opening value) and Gilliat if the FTSE drops below 3,000 – but compared with the recent levels of the FTSE, these plans offer a competitive trade off and a real opportunity to battle the ongoing threat of inflation.

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Capital Growth

Due to the flexibility in how structured investments can be put together, there is a wide range of growth options available. Many of which are based on the performance of the FTSE 100 which offers investors a defined return for a defined level of risk.

The Kick Out

One of the most popular structured investments is the kick out plan. This type of plan offers the potential to mature early providing a fixed return for each year the plan has been in force.

Investec’s Enhanced Kick Out Plan is currently offering 13.5% per year, the highest rate ever for this type of plan. This return is achieved should the FTSE be higher than its starting value at each anniversary, meaning that a high return can be achieved even if the FTSE has only gone up by a small amount.

The Geared Return plan

Another type of plan is the Geared Return. These pay a fixed return provided the FTSE is higher at the end of the plan that it is at the start. If this occurs, Legal & General’s Growth Plan offers a return of 55% whilst Investec’s Geared Returns Plan offers 75%, both at the end of the five year term. One of the differences between these plans is some use averaging to reach a final index level whereas others do not. Again, these are a potential consideration if you think the FTSE will rise but only by a small amount.

The Accelerated Growth plan

If you feel that the FTSE could rise by quite a margin then Accelerated Growth plans could offer a solution. These return a multiple of any rise in the FTSE. Investec’s Accelerated Growth Plan for example, offers 200% of any rise in the FTSE 100 and so if you consider the FTSE could rise over the term then this could be worth a closer look.

Defensive plans

Finally, there are also defensive plans which offer a return even if the FTSE falls in value. For example Morgan Stanley’s Booster Plan will provide a 60% return after 6 years, even if the FTSE has fallen by up to 20%. This plan also includes a unique booster feature which allows you to receive a positive return if the FTSE falls between 20% and 50% and cushions the losses if it falls beyond that.

For those who are more risk averse and desire capital protection but would still like the opportunity of returns linked to the stock market, structured deposits have gained considerably in popularity recently. For an overview of what the market currently has to offer, please click here.

Compare growth options »

In conclusion ...

The major attraction of structured investments is that you know exactly what needs to happen to provide the target level of return. The daily ups and downs associated with the stock market become less important and the informed decision to invest based on the trade off between capital loss and the potential returns available can be made beforehand.

Combined with the potential to beat inflation and with a range of income and capital growth options available, these plans really do offer a competitive solution.

 

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment please contact us for advice.

These are structured investment plans that are not capital protected and are 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
 

Growth Structured Investment Plans
ProviderPlan NameCounterpartyISA OptionTermMaximum Potential ReturnMore Info
FTSE 100 Enhanced Kick Out PlanInvestec Bank plcyesUp to
6 years

10%

per annum

More Info >
Structured investment plan with the potential to mature after years 1, 2, 3, 4, 5 or 6. If the plan matures early it will return 10% times the number of years the plan has been in force. Also available for Stocks & Shares ISA and ISA transfer.
FTSE 100 Defensive Growth PlanInvestec Bank plcyes6 years

34.0%

after 6 years

More Info >
6 year structured investment plan which aims to return 34% if the FTSE 100 is higher than 50% of Initial Level. Available for Investment ISA, and ISA transfer.
FTSE 100 Step Down Kick-Out PlanInvestec Bank plcyesUp to
6 years

8.25%

per annum

More Info >
Structured investment plan with the potential to mature after years 2, 3, 4, 5 or 6. If the plan matures early it will return 8.25% times the number of years the plan has been in force. Also available for Stocks & Shares ISA and ISA transfer.
FTSE 100 Defensive Kick-Out PlanInvestec Bank plcyesUp to
6 years

7.75%

per annum

More Info >
Structured investment plan with the potential to mature after years 3, 4, 5 or 6. If the plan matures early it will return 7.75% times the number of years the plan has been in force. Also available for Stocks & Shares ISA and ISA transfer.
FTSE Defensive Kick Out PlanCredit Suisse AGyesUp to
6 years

7.30%

per annum

More Info >
Structured investment plan with the potential to mature after years 2, 3, 4, or 5. If the plan matures early it will return 7.30% times the number of years the plan has been active. Also available for Stocks & Shares ISA and ISA transfer.
FTSE Step Down Kick Out PlanNatixisyesUp to
6 years

7.30%

per annum

More Info >
Structured investment plan with the potential to mature after years 2, 3, 4, or 5. If the plan matures early it will return 7.30% times the number of years the plan has been active. Also available for Stocks & Shares ISA and ISA transfer.
Important Information: Structured investment plans are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Income and growth returns are not guaranteed. There is a risk of losing some or all of your initial investment due to the performance of the underlying Index or commodity. There is also a risk that the company backing the plan known as the Counterparty may be unable to repay your initial investment and any returns stated.