Ways of supplementing income have been by far the most popular requests from investors in recent months. But what features contribute to a top selling income investment? We take a closer look at our most popular income investment in order to find out what is driving such a high demand.
The Bonus Income Plan
Our top selling income investment this year is the Bonus Income Plan from Investec Bank plc. The plan is a five year fixed term investment which pays a fixed income of 7.25% each year (the monthly version pays 0.6% each month, equivalent to 7.2% per year). The plan also offers the potential for an additional 0.5% bonus for each year the FTSE 100 ('the FTSE') ends higher than it’s starting value.
Your capital is at risk should 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 main differentiators from other types of income investments.
The fixed income available from this investment stands at 7.25% which is by far the highest income available from this type of plan. This yield is also high when compared to other types of income investments, which is perhaps one of its major appeals.
Equity funds will struggle to offer such a high return on your investment with a traditional FTSE 100 equity portfolio having a much lower yield historically, although you are able to benefit from any rise in the capital value of your investment which is not the case with the Bonus Income Plan.
This being said, most funds have failed to provide a 7% total return for each of the last five years. Some bond funds could provide a comparable return but they will normally have to have exposure to high yield/higher risk assets in order to achieve similar results and owing to the pooled nature of these investments there is also the real potential for capital loss.
The fact the yield is fixed and therefore not dependent on the performance of the FTSE is another attractive feature since the investor has the certainty of knowing at the outset exactly how much he will receive each and every year.
Another favourable aspect is the payment frequency with a monthly option available. Many funds only offer twice yearly or quarterly payments so the ability to supplement monthly income is attractive.
The fact the income is fixed also sets it apart from other investments. Alternative income investments available via funds, whether these are bond funds or equity funds, will only be able to offer a variable yield so you are never sure whether it will meet your income requirements year on year.
Investment funds are also open ended. This means that you can go in and out of them whenever you choose and most funds will over a daily valuation of your investment. The Bonus Income Plan is a fixed term investment and is designed to be held for the full term since early withdrawal could result in you getting back less than you put in.
Although this is not markedly different from a fund, the fact that this investment is for a fixed term can be a useful feature for certain investors since providing a defined term at outset allows you to be able to plan around this accordingly.
In addition, one of the difficulties with funds is that as an investor you are often concerned about when to come out of the market – when is the right time to crystallize any gains or losses? What should you do as you grow closer to needing some or all of your investment? The fixed term removes these concerns.
Conditional capital protection
In order to receive the opportunity for higher returns, every investor will know that more often than not you will be required to put your capital at risk. The Bonus Income Plan contains what is known as conditional capital protection which means that the return of your initial investment is dependent 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. However, if the FTSE falls by more than 50% from the starting value and finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE.
As a comparison, funds are open ended investments and as such are priced on a daily basis according to market movements and supply and demand of the fund. Therefore your capital is at risk on a daily basis and so any income received must also be weighed up against any fall or rise in the capital value of your fund.
Risk v reward
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 potential of a higher return.
Current leading five year fixed rates are offering around 4.15% so by accepting risk to your capital, you are increasing your potential annual return by just over 3% a year, excluding the additional 0.5% bonus on offer. Depending on your view of the FTSE, this could be an attractive trade off and has clearly been a popular one with investors.
One of the reasons why Investec is able to offer the highest rate for this type of investment is their credit rating. Unlike a fund, some of your investment is used to purchase securities issued by Investec Bank plc and so the credit rating of the institution becomes more important.
Fitch is one of the main global credit rating agencies and has assessed Investec Bank plc as BBB- which means they are of the opinion that the Bank has a good credit quality and adequate capacity for payment of financial commitments but adverse business or economic conditions are more likely to impair this capacity.
With funds you are investing in a number of stocks or bonds within your investment. This helps to diversify your portfolio which consequently helps to reduce the overall risk within the fund. However, if it still important to understand what you are investing in. The popular Invesco Perpetual Monthly Income Plus fund for example has almost 65% invested in non-investment grade securities (i.e. lower risk than Investec), almost 20% of which are in equities.
For those who wish to reduce the impact of counterparty risk the plan also offers a UK 5 version which spreads the counterparty risk between 5 institutions equally (HSBC, Nationwide, Santander, The Royal Bank of Scotland and Lloyds TSB). This version offers a fixed income of 6% per year with a potential annual bonus of 0.5%.
Investec Bank plc
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.
One final feature which has received positive customer feedback is the tax treatment of your investment. Outside of an ISA, the annual return you receive is treated as a return of capital so is 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 (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.
This is a clear differentiator to investments which are subject to income tax. Please note that this information is based on current law and practice which may change at any time.
An attractive option
Understanding how this investment plan compares with funds helps to highlight some of the attractive features of the Bonus Income Plan as well as the differences. It is certainly important to understand the increased importance of counterparty risk and as such this income plan could form part of a wider investment portfolio.
In the final analysis, the combination of high income and conditional capital protection has clearly struck a chord with investors who see the balance of risk v reward as an attractive one.
How to invest
The latest version has only just launched and is available for direct investments, ISAs and ISA transfers. As with all previous versions it is a limited offer which ends on 17th August with applications for ISA transfers having to be received by 3rd August. The plan start is 3rd September.
Click the link below to receive a full brochure pack by both email and post which includes all of the relevant application forms. Should you have any questions, please contact our Investment Helpdesk on 0845 308 2525.
Find out more about the Investec Bonus Income Plan »
* Source: Investec Group Factsheet, May 2012
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