Whether you are looking for income or growth from your investment, deciding what factors to consider can be daunting. The defined risk and return offered from structured investment plans has made them the most popular type of investment here at Fair Investment.
We give you our Top 10 tips when selecting an investment plan that is right for you, and provide you with our selections from the current range on offer.
1. Income options
Decide whether you want a fixed income or a variable income. The latter will often provide the potential for a higher income as it is dependent on the performance of an index rather than being paid to you regardless.
You will also need to decide how often you want the income to be paid, with a higher frequency of payments normally translating to a lower yield. With monthly, quarterly and annual payments available, there is a wide choice to match a range of investor needs.
- Selected fixed income plan: Investec’s Bonus Income Plan – 7.20% fixed per annum with a potential 0.5% bonus, monthly income.
- Selected variable income plan: Gilliat’s Income Builder Plus – up to 8.24% per annum provided the FTSE 100 remains above 3,500, quarterly income.
2. Growth option – the Kick Out
Kick Out plans are consistently popular since they offer the opportunity for a competitive return whether the market stays relatively flat, goes up or even goes down (see tip 4 below). The investment can mature early provided the Index is higher than its starting value, so can produce a return even if the market has only gone up by a very small amount.
Remember that the headline rate of return is not compounded and also watch out for the earliest date the investment can kick out - some offering higher returns can only kick out from year two onwards rather than the first year.
- Selected kick out plan: Investec’s Enhanced Kick Out – potential 13% each year, kick out from year one.
3. Other growth options
There are a number of additional growth investments available that offer a fixed return at the end of the term, which is normally dependent on or calculated based on the performance of an index. When considering this type of investment, consider the minimum return you are prepared to accept in return for putting your capital at risk.
For example, if it is a high fixed return on offer versus no return at all, you need to be prepared to accept this. Another tip is to consider the equivalent annual rate of return required in order to provide the fixed return on offer – for example, a fixed return of 61% at the end of a five year term is equivalent to 10% per year compound.
- Selected growth investment: Legal & General Growth Plan - 65% if the FTSE finishes higher than its starting value.
4. ‘Defensive’ plans
The recent levels of the FTSE have also seen an increase in the number of so called defensive plans. The term ‘defensive’ normally relates to a reduced or decreasing level which the index has to be above in order to provide a return, therefore offering returns even in a decreasing or falling market. Therefore, be careful to understand exactly what the use of the word defensive means in the plan - in particular the amount that the index is able to fall to and still provide the stated return, as well as when the reduced levels take effect.
- Selected defensive plan: RBS UK Step-down Defensive Kick Out - 9.3% return if the FTSE is higher than its starting value in year one, required FTSE level reducing by 3% each year thereafter.
5. Counterparty risk
Your investment is used to buy securities issued by the counterparty as it is these which are designed to produce the stated returns. To this end, you need to understand that you are holding securities in a bank (or private bank) and so the possibility of that institution becoming insolvent is an important factor in making your decision.
Broadly, those with a higher credit rating will offer lower returns than those with lower credit ratings, since with the latter you are taking more risk and therefore need to be compensated with the potential for higher returns.
Some plans offer more than one counterparty option where the return will be linked to the rating, whilst others will offer to diversify this risk by using a portfolio of securities split between a number of institutions, thereby spreading your risk equally across each one.
6. Credit ratings agencies
The use of credit ratings agencies has become much more prominent in recent years in order to help investors to understand the risk of the counterparty being unable to pay any returns due to experiencing severe financial difficulties.
You should note that these are only ratings, and that they cannot take into account every single factor that could affect your investment. However, surveying all three of the main agencies (Moody’s Standard & Poor’s and Fitch) should give you a reasonable feel of the risk involved since they each have their own research methodology. Wherever possible, Fair Investment uses the same agency (Standard & Poor’s) so that you are comparing like for like.
7. Conditional capital protection
One of the features which sets these investments apart from others is that they include what is called conditional capital protection. This means that your initial investment will be returned to you unless the index falls below a certain level, which is known to you before investing. With plans linked to the FTSE 100, this is commonly 50% of the value at the start of the investment.
Watch out for the level that must be breached before your capital is put at risk and whether this is calculated throughout the investment term or only at the end. Those offering the higher returns will normally monitor this throughout the investment term, but also remember that past performance is not a guide to what will happen in the future.
The majority of investments are based on the underlying index being higher or lower than a particular level which is usually set at the start of the investment. Some investment plans will use averaging in calculating whether your investment has met the required level and so it is important to understand how this works.
Those who offer the higher returns will often have a longer period of averaging. Although this can reduce the adverse effects of a falling market or sudden falls shortly before maturity, equally it can also reduce the benefits of a rising market or sudden market rises shortly before maturity.
The investor has the benefit of knowing at outset the conditions that need to be met in order to provide the stated returns, thus providing a defined return for a defined amount of risk, which can be easily compared with alternative investments.
One tip to remember is that owing to how these products are structured, plans which provide an annual return on your investment in the form of any income are sometimes subject to capital gains tax rather than income tax since the annual returns are deemed a return of capital.
This could have potential tax advantages for those who do not use any or all of their CGT allowance and have already used their ISA allowance. Since all of these investments are available within an ISA wrapper you can also use them to maximise your annual ISA allowance. Please note that this information is based on current law and practice which may change at any time.
10. Fixed term
These investment plans are designed to be held for the full term. Although you can obtain a surrender valuation at any time, the secondary market for these types of investments is very small and so you are in no way able to guarantee that you will receive your original investment back. Therefore, before you commit, make sure you have enough money set aside for emergencies in accounts where you can easily access the funds.
Summary – a compelling mix
The defined risk and reward, coupled with a wide choice of income and growth options makes for a competitive investment. Many of the providers have strong credit ratings and another attractive feature of these investments is that there are no additional charges – the headline rate on offer is after all charges are taken into account so there are no hidden surprises.
The current market covers a range of counterparties, collateralised versions, ‘defensive’ plans and the potential for high returns when balanced with the conditional capital protection included. This gives a variety of plans from a number of different providers allowing the investor plenty of choice. Have a look at our main investment plans and opportunities page for our latest deals
Compare income investments »
Compare growth investments »
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.
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