Investment Focus: Investec’s Enhanced Income Plan
Last updated: 10/11/2015
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 sits somewhere between a fixed rate bond and directly holding a dividend yielding share. As the demand for income, whether fixed or variable, remains high on the agenda for both savers and investors, we take a look at what makes this one of our best-selling income investments.
The best just got better
The Enhanced Income Plan is a relatively straightforward plan to understand. It pays a fixed rate of income, every month, for a fixed term, with your money back at the end of the term unless the FTSE 100 Index falls more than 50% below its value at the start of the plan. The current version offers investors a fixed income of 5.28% each year, which is the highest rate we have seen for nearly a year.
What is driving customers?
This is our best-selling income investment plan. 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. Traditional income solutions often focus on fixed rate bonds at the capital protected end of the risk spectrum, to yield targeting investment funds or shares at the fully capital at risk end. This investment combines some of the most popular elements of the two.
Invest in the FTSE now?
Apart from a few blips, most recently in recent months, investing in the stock market over the last couple of years will have mostly 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 volatile and 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.
Where have all the fixed rates gone?
In contrast to the growth of the FTSE, savings rates are still at record lows and with no realistic prospect of any sudden sharp increases let alone a return to the rates of yester-year and those heady days of 5% plus interest rates, 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. So let’s take a look at its main features…
With savings rates at such low levels, the prospect of a high fixed income is an attractive one. Unusual for an investment which normally pay a variable income dependent on the performance of the underlying asset, this plan pays a fixed income regardless of the performance of the stock market. The current issue of the plan is paying 5.28% p.a. fixed, which means that the investor has the certainty of knowing at the outset exactly how much they 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 5.28% on offer from the current version, this equates to 0.44% 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.
Many savers will be used to a fixed term whilst this feature should also appeal to those who wish to plan around this accordingly. Combined with a fixed and regular level of income, this also means that 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 also very important to understand the balance of risk versus 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.
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 April 2015 they look after £124.1 billion of customer assets, employing around 8,200 people. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their UK banking operation, Investec Bank plc, looks after £10.3 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.
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 3.10%, and so by accepting risk to your capital, you are increasing your fixed return by around 2.18% a year (since the fixed income from this investment is 5.28%). 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.
Fair Investment conclusion
Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “One of the main attractions with the Enhanced Income Plan is the ability for potential investors to consider its risk versus reward prior to investing. The plan pays a fixed income, each month, for a fixed term – so you know exactly what you will receive, when, and for how long – whilst you get your capital back at the end of the term unless the FTSE has fallen by more than 50%.“
He continued: “Compared to other income investments, this defined return for a defined level of risk could be attractive whilst the monthly income and fixed income features are often high up on the list of priorities for income seekers.”
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.