The search for income intensifies as a result of the significant reduction in long term fixed rates, poor bond yields and increasing inflationary pressures. What will happen in the coming months is unclear, but the Bonus Income Plan from Investec seems to have particularly benefitted from these recent events. We therefore take a look at our Top 10 reasons to consider this investment to help understand why.
Inflation v low interest rates
The economic environment is causing a real headache for savers and investors alike with inflation being one of the main culprits. The Consumer Price Index currently stands at 2.7%, which means that a basic rate taxpayer has to get at least 3.38% and a higher rate tax payer 4.50% just to keep pace. When compared to the Retail Price Index, currently at 3.2%, these figures increase to 4.00% and 5.33% accordingly.
Unfortunately, the market for fixed rates has been decimated by the Bank of England’s Funding for Lending Scheme with nothing getting close to these returns in the short and medium term and only one or two deals anywhere around the 3.25% for those looking at the longer term. Based on current market trends there is every possibility that these also may not be around for long.
Investec to the rescue
Coupled with lower yields on corporate bonds and the uncertainty around the risk v reward of investing directly in high dividend equities, it is clear that the opportunities to benefit from the potential for a high return are limited and yet the need for income remains as high as ever before.
The Bonus Income Plan is one of the most popular income investments with our customers and against this economic backdrop it is little wonder why it continues to thrive. To help see what is driving this popularity, we review our Top 10 reasons to consider this investment.
1. Fixed income
Although not obvious from the title, one of the most attractive features of this investment is that your income is fixed and paid to you regardless of the performance of the stock market. At 6.36% per year this is a high level of fixed income compared with what is on offer from other income investments and also means that you have the certainty of knowing at the outset exactly how much you will receive each year and when.
2. Bonus opportunity
In addition to the high level of fixed income, there is also the opportunity to receive a monthly bonus. The bonus is paid if the level of the FTSE 100 (the ‘FTSE’) is higher at the end of each month than its value at the start of the investment. If it is, then a bonus of 0.04% is paid, equivalent to the potential for an additional 0.48% each year.
If the FTSE is lower at the end of the month, the bonus is not paid and then the level is monitored again the following month, and so on. The value at the end of each month is based on the average of the closing values of the FTSE on the monthly observation date and the four previous business days.
3. High yield
Combining the generous level of fixed income with the opportunity for a bonus and the combined yield potentially available is high at 6.84% per year. Since the majority of this income is fixed and not reliant on the stock market, compared to alternatives this offers the potential for an attractive overall yield.
4. Monthly income
Not only does the investment offer the opportunity for a competitive income, but another popular feature is the monthly payment frequency since 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.
5. 5 year term
Many fixed term investments currently available in the market offer a 6 year term whilst the Bonus Income Plan has a five year term which seems to be a more popular timeframe with investors. 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 and the plan is really designed to be held for the full term.
The fixed term will though appeal to those who wish to plan around this and combined with a fixed return offers investors some certainty of what the coming years will yield.
6. 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.
The Bonus Income Plan contains what is known as conditional capital protection. This means that provided the FTSE does not fall by more than 50% during the investment term, your initial capital will be returned in full.
However, if the index does breach this 50% barrier, your investment effectively becomes a FTSE tracker and should the FTSE remain below its starting value at the end of the term, your initial capital will be reduced by 1% for every 1% reduction. The fixed part of your income though will be unaffected.
7. Tax treatment
Another 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 and is therefore 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.
Please note that this information is based on current law and practice which may change at any time.
8. ISA eligibility
The Bonus Income Plan is able to accept new ISA investments and you are also able to transfer existing ISAs.
Please always note the ISA transfer deadline for applications into the current issue.
9. Collateralised option available
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 (known as counterparty risk). 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.
For those who wish to mitigate the credit risk within the Bonus Income Plan, 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 currently offers a fixed income of 5.04% per year with the same potential annual bonus of 0.48%.
10. Defined return v defined risk
The principal of defined risk v defined return is useful when considering the Bonus Income Plan since the fixed returns available as well as the criteria required to provide bonus payments and a return of capital are known at the very 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 you are taking in order to receive the potentially higher return. In real terms the 6.36% fixed return offers the potential for a premium over current 5 year fixed rates in the region of 3% and should the investor receive some or all of the bonus payments on offer each month, this premium moves even higher.
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.
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.
The minimum investment for the Bonus Income Plan from Investec is £3,000.
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.
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