The hunt for a competitive fixed income intensifies amidst the significant reduction in long term fixed rates, volatile gilt and bond yields and unexciting dividends from FTSE 100 companies. However, by combining a high fixed income with conditional capital protection, one of the real investment stories of last year seems to be particularly well placed to address these economic pressures. We therefore take a look at our Top 10 reasons to consider the fixed income investment to help further understand why this type of investment is proving so popular.
1. Fixed income
Receiving an investment income that is not reliant on the performance of the stock market is a rare thing. However, this is exactly what the fixed income investment achieves and, as the title suggest, the exact amount you receive is known at the outset. Most other income investments offer a lower and variable yield and so the opportunity to access a healthy and predictable income stream is clearly a key feature.
2. High income
Not only is the income fixed, but it is often offered at a high level with yields of 6.48% currently available. When compared to dividend yields available from many UK equity income funds, this is considerably higher, however funds do have the opportunity to benefit from capital growth, whilst the fixed income investment does not.
3. Monthly income
Not only does the investment offer the opportunity for a competitive income, but another popular feature is the monthly payment frequency. This is the most useful in terms of budgeting, especially if you are looking to supplement existing income. Many other income investments that promote their yield only offer biannual or quarterly payments.
4. Fixed term
In addition to the income being fixed, these investments also have a fixed term, normally in the region of five to six years. Thus, the investor knows not only how much they will receive and when it will be paid, but also for how long these payments will continue, and so will particularly appeal to those who wish to plan around these certainties.
Although you do have the option to withdraw your money during the term, early withdrawal could result in you getting back less than you invested, so the plan is really designed to be held for the full term.
5. Conditional capital protection
Understanding the risk v reward of an investment is an important one, especially since the opportunity to receive higher returns than might be available from cash deposits inevitably requires the investor to put their capital at risk. Fixed income investments incorporate what is known as conditional capital protection, which means that provided the FTSE 100 does not fall by more than 50%, your initial capital will be returned in full.
This is measured either throughout the investment term or on the last day only, and if the index does breach this 50% barrier, your investment effectively becomes a FTSE tracker and should the FTSE remain or finish below its starting value at the end of the term, your initial capital will be reduced by 1% for every 1% reduction. The fixed income part of your investment remains unaffected.
6. ISA eligibility – tax free income
All fixed income investments offered through Fair Investment Company are able to accept new ISA investments and you are also able to transfer existing ISAs. The income paid from an investment held within an ISA is not then subject to tax, thereby resulting in the payment to the investor of a high level of tax free income - attractive in any economic climate. Since these investments are normally offered for a limited period, please always note the ISA transfer deadline for applications into the current issue.
For the current tax year (2012/13) the annual allowance is £11,280 per individual, increasing to £11,520 from 6th April 2013 (2013/14 tax year). These investments also accept transfers from Stocks & Shares ISAs as well as Cash ISAs but you should be aware that once Cash ISAs are transferred to a Stocks & Shares ISA, they cannot be transferred back to a Cash ISA. Please note that this information is based on current law and practice which may change at any time.
7. No hidden charges – a cost effective option
With our range of fixed income investments, all of the charges are taken into account in the headline return so there are no hidden surprises. Compare this to a typical UK equity fund, which will often have an initial charge of up to 5.5% and total annual charges of 1.95% on average (source: IMA, 2012).
The costs associated with the management of funds happens each and every year (in both actively managed and tracker funds) which helps to explain the number of funds which fail to outperform the FTSE, especially over a five year period. This ongoing cost is not a feature of fixed income investments, since all charges are included in the headline rate of return.
8. A disciplined approach
The mechanics of these investments remove the need for the investor to worry about when to come out of the market since the decision is made for them by the pre-defined investment term. When the plan matures, the investor then has the opportunity to reassess their options.
9. Defined return v defined risk
The principal of defined risk v defined return is useful when considering fixed income investments since the returns available as well as the criteria required to provide a return of capital are known at the outset.
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 to your capital in order to receive the higher return. In real terms, a 6.48% fixed return offers the potential for a premium over current 5 year fixed rates in the region of 3.5% each year. However, the plan does put your capital at risk, and should only be considered by those who are prepared to accept the possibility of losing some or all of your investment.
10. Collateralised options available
Unlike a fund, your investment is used to purchase securities issued by the institution offering the fixed income investment and so their ability to meet financial obligations becomes an important consideration (known as counterparty risk).
There are a number of credit ratings available provided by leading credit rating agencies such as Standard & Poor’s, Fitch and Moody’s and although these are only one way to assess the counterparty to each individual plan, they do provide a useful starting point. For those who wish to mitigate the credit risk, some fixed income investments offer the option to spread this risk by using a number of counterparties although the potential fixed returns on offer will be slightly lower.
Fixed income investment selection
The Enhanced Income Plan from Investec is currently our most popular fixed income investment. Commenting on the plan, Fair Investment Company head of savings and investments, Oliver Roylance-Smith, said: “The high level of fixed income and the monthly payment frequency makes for an attractive investment and with low interest rates, the huge void of opportunities in the savings market and real uncertainties around future inflation, this plan provides a competitive overall balance of risk v reward and could be considered by both savers and investors.”
The plan is open for direct investments, ISAs and ISA transfers with a minimum investment of £3,000.
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.
The investments referred to in this article 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