Investment Focus – Investec Enhanced Income Plan
Last updated: 09/06/2015
By combining a high level of regular fixed income with some capital protection against a falling stock market, the Enhanced Income Plan from Investec Bank has year on year been one of our most popular income investments. With the need for income often at the forefront of both savers and investors minds, we take a look at why this investment plan has proved to be a consistent best seller.
Income needs high on the agenda
Whether you are working and need to supplement your earnings, or retired and looking at options for your pension or ways to add to your pension income, the need for income is one of the most common demands put on our capital. In the last few months we have also witnessed some of the most radical changes to pension legislation in living memory, allowing individuals far greater flexibility to withdraw cash from their pension. But as annuity rates continue to offer low annual yields, whatever your situation the ability to generate an attractive income stream is a challenge, despite usually being the first item on the agenda.
Savers and investors face contrasting fortunes
Apart from a few blips, investing in the stock market over the last couple of years will have been a rewarding experience, culminating in the FTSE breaking through the 7,000 barrier for the first time in history. And yet despite the attractive dividend yields we have seen from a number of our largest companies, whilst the FTSE 100 Index remains at record high levels, there are many investors who remain uncertain about the level of income that might be enjoyed in the coming years. Remember, it is the income and any capital loss/rise combined that contribute to your overall return.
In contrast to the growth of the FTSE, savings rates are still at record lows and with no realistic prospect of a quick turnaround to the rates of yesteryear, whatever your situation the ability to meet income needs remains a very real challenge. But against this backdrop of intense pressure on savers, and whilst stock market conditions perhaps raise more questions than they do answers, this investment from Investec has remained a top seller with income seekers
In a nutshell
The Enhanced Income Plan is a relatively straightforward plan to understand. The current version offers investors a high fixed income of 5.16% each year and your investment has a fixed term of six years. Your capital is at risk should the FTSE 100 (‘the FTSE’) fall below 50% of its starting value on any closing date throughout the investment term and also finishes below the starting value. This is known as conditional capital protection and is one of the plan’s main differentiators from other types of income investments.
The current issue of the plan offers a high level of income at 5.16% per year, but whilst yield on many traditional income investments is normally variable, one of the main features of the Enhanced Income Plan is that the income is fixed rather than being dependent on the stock market. This means that the investor has the certainty of knowing at the outset exactly how much he will receive each and every year.
Another popular feature is the monthly payment frequency since this is the most useful in terms of budgeting, especially when many UK equity income funds only offer twice yearly or quarterly payments. Therefore, not only does the investment provide a high level of fixed income, but it also pays this on a monthly basis which could be an important feature when looking to supplement existing income. At 5.16% on offer from the current version, this equates to 0.43% paid each and every month for the entire term of the plan.
The Enhanced Income Plan has a six year fixed term and although you do have the option to withdraw your money early (and in this respect is not dissimilar to investment funds), the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested.
The fixed term will though appeal to those who wish to plan around this and combined with a fixed and regular level of income, the full plan terms are known at the outset and so investors can consider more clearly the risk versus reward prior to investing their capital.
Conditional capital protection
When considering investment options it is important to understand the balance of risk v reward. Inevitably, the opportunity to receive higher returns than might be available from cash deposits requires the investor to put their capital at risk.
The Enhanced Income Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional 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 but if it falls below, and also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE. Therefore your capital is at risk and you could lose some or all of your initial investment.
Risk v reward
The principle of risk versus reward means that the search for potentially higher returns leads to the need to put your capital at risk. 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 capital you are taking in order to receive the opportunity for a higher return.
Leading five year fixed rates are currently offering around 3%, and so by accepting risk to your capital, you are increasing your fixed return by over 2% a year (since the fixed income from this investment is 5.16%). With the market failing to meet the need for higher income, the decision is whether you are comfortable with putting your capital at risk and the conditional capital protection offered in order to achieve the potential for a higher return.
Credit ratings and agencies
Unlike a fund, your investment is used to purchase securities issued by Investec Bank plc and so their ability to meet financial obligations becomes an important consideration. Fitch is one of main global credit rating agencies and awarded a credit rating of BBB- with a stable outlook (awarded 22nd January 2014).
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 stable outlook indicates that the rating is not likely to change in the short to medium term, i.e. in the next 6 months to 2 years.
Investec Bank plc
Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, as at 31st March 2014 they look after £111.4 billion of customer assets as well as a further £22.6 billion of customer deposits, employing around 8,200 people. They specialise in a number of areas, particularly within the banking sector and are a leading provider of investment plans and structured deposits.
Fair Investment conclusion
Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “When considering your income options, it is important to fully understand how each investment works, as well as the risk that is being taken. Whether this is inflation risk, risk of capital loss or the risk of fluctuating yields, it should always be remembered that it is the income and capital loss/rise taken together that affect your overall return. By combining a fixed income with conditional capital protection, the Enhanced Income Plan offers a defined return for a defined level of risk, which is perhaps one of the features that helps explain this investment’s popularity.”
He continued: “The high level of fixed income, monthly payment frequency and fixed term provides a degree of certainty not usually found with an income investment. Compared to other income alternatives available in the market or investing directly in equities, this plan could offer a compelling balance of risk versus reward. Which of these features is the most appealing will vary among investors, but could equally appeal to fixed rate savers prepared to put their capital at risk in return for a high fixed income. “
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.