New ISA allowance all wrapped up with our ISA season best seller
The start of the new tax year brings with it a new and increased ISA allowance, which is open to every adult in the UK and is available right now. The recent Budget confirmed the ISA allowance would increase by inflation so the current 2015/16 tax year limit stands at £15,240 and has been available since 6th April. For investors looking for tax free income and who want to make the most of this new allowance straight away, we take a closer look at our most popular income plan during the recent ISA season and explain why it might be a compelling option for all those seeking income, both savers and investors alike.
Investors seeking income
Whether you are new to investing or a seasoned investor, the need to generate an income is one of the most common demands put on our capital and can cover a wide range of savings scenarios. If you are one such investor actively seeking income then this fixed income investment plan is certainly worth a closer look.
In a nutshell
For those who wish to get the tax year off on the right foot, the Enhanced Income Plan from Investec is our most popular income plan this ISA season. The current version offers investors a fixed income of 5.04% each year for a six year term and pays income to you each month (equivalent to 0.42% per month). Your capital is at risk should the FTSE 100 Index (‘the FTSE’) fall by more than 50% during the term of the plan and fails to recover by the end of the plan term, in which case you could lose some or all of your initial investment. This is known as conditional capital protection and is one of the investment plan’s main differentiators from other types of income investments.
A high fixed income
A fixed income is rather uncommon amongst income investments which normally offer a variable income based on prevailing market conditions and the performance of the underlying investments. This is therefore a popular feature since it provides investors with the knowledge of exactly how much income they will receive, when and for how long. When held within an ISA, the 5.04% fixed income is also paid tax free. This is equivalent to basic rate tax payers receiving 6.3% interest and higher rate tax payers 8.4%.
Compared to cash
Since this investment offers a fixed income over a fixed period, it is relatively easy to compare those elements with cash and a guaranteed return that you would receive from a fixed rate bond of similar duration (subject to the bank/deposit taker remaining solvent). Although there is not a market for six year fixed rate bonds there has historically been a healthy market for longer term fixed rates with five year fixed rates traditionally offering the higher returns as compensation for you committing your capital for longer. Unfortunately the market here has declined with leading rates currently offering no more than 2.50%. This investment therefore offers a premium of 2.54% in return for putting your capital at risk.
So the main question to consider is whether you are prepared to risk your capital in return for just over double the interest you could receive from the current market leading fixed rate Cash ISA, where the return of your capital at the end of the term is protected. Is the additional 2.54% income each year worth the risk that the FTSE may fall by more than 50%?
Compared to investment funds
Some of the yields available from investment funds certainly catch the eye, with many bond funds offering yields in excess of 5%. There are three main differences between the Investec fixed income plan and investment funds:
The income from investment funds is not guaranteed and is dependent on the underlying holdings and market conditions. Since these will vary over time, so too will your income. The income from the Investec plan is fixed and so remains the same throughout the term.
The treatment of your capital is different to the Investec plan in that there is no conditional capital protection – your capital is fully at risk on a daily basis. This is important since the income yield and any rise or fall to your original capital should always be considered together since both have an effect on your overall return. For example a 6.60% income yield could be compelling in its own right but not so if it coincides with a 6.60% reduction in the value of your capital.
An investment fund generally invests in a number of holdings and with bond funds this can sometimes be in the hundreds. This has the effect of spreading the risk of your investment so if one of the holdings fails or falls in value significantly, it has less of an impact on your overall return. Your investment into the Investec plan buys securities issued by Investec Bank plc only and so your income and return of capital is also dependent on their ability to meet their financial obligations. This means the credit rating of the Bank becomes an important consideration.
Also remember that investment funds have annual management charges (normally up to 1%) which have an impact on the overall performance. There are no annual management charges associated with the Investec Enhanced Income Plan.
Fair Investment conclusion
When considering income investments it is important to understand fully how each investment works and the risks it entails. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remembered that it is the income and capital loss/rise combined that produce your overall return and this is before tax is taken into consideration.
Commenting on the Enhanced Income Plan from Investec, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “As an alternative to open ended investment funds, the defined return and defined risk offered by fixed term investments offer investors an alternative approach to achieving income and an often competitive balance of risk versus reward.”
He continued: “Their conditional capital protection means that your initial investment has some protection against a falling market and the high level of fixed income, monthly payment frequency and fixed term provide a range of features that could be attractive to both savers and investors. 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. Where else can you receive 5.28% fixed income each year, paid to you regardless of what happens to the stock market? It is therefore understandable why the Enhanced Income Plan from Investec Bank has been one of our most popular income investments.”
The plan is open for new investment ISAs (£15,240 limit), Cash ISA and Stocks & Shares ISA transfers and non-ISA investments with a minimum investment of £3,000.
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 current legislation and your individual circumstances which may change in the future. Before transferring an ISA please check there are no penalties for withdrawal from your existing ISA provider.
The Investec Enhanced Income Plan 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.