Savings Focus: Investec 6 Year Defensive Deposit Plan
The economic environment continues to create challenges for savers, brought about in the main by the impact of record low interest rates on our savings and our future. Whilst the current market for traditional fixed rates still offers some of the lowest rates ever seen, it is perhaps easy to understand why the potential for higher returns available from the range of structured deposit plans is becoming a more compelling option for savers to consider. With this in mind, we take a detailed look at one of our most popular, the FTSE 100 6 Year Defensive Deposit Plan from Investec Bank, to find out why this plan could be an alternative for your deposit or Cash ISA savings.
Traditional savings products underperforming
The current economic environment is as challenging as it’s ever been and those that are feeling it most are cash savers looking for a competitive net return on their deposit, once tax and inflation are taken into account. Unfortunately, many traditional savings products are failing to deliver with both instant access and fixed rate bonds continuing to offer record low rates.
Potential for higher returns
By linking your returns to the FTSE 100 Index, this structured deposit plan offers the potential for higher returns than those that are available from more traditional products such as fixed rate bonds. The upside is the potential for higher returns whilst the downside is that since your return is linked to the performance of the UK stock market, unlike a fixed rate it is not guaranteed. This is the trade off for the opportunity to receive higher returns.
Potential return of 33% after 6 years
The Investec FTSE 100 6 Year Defensive Deposit Plan protects your initial deposit whilst offering a fixed return of 33%, provided the level of the FTSE 100 Index at the end of the plan is higher than 90% of its value at the start of the plan, subject to averaging. So the FTSE can fall up to 10% and you still receive the full growth return. The 33% fixed return is equivalent to around 4.85% AER. If at the end of the six year term the Index is equal to or lower than 90% of its value at the start of the plan, you will not receive a return but your original capital will be repaid.
Since the fixed return on offer is dependent on the performance of the FTSE 100 Index, the defensive element of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 10% and the fixed return of 33% is still paid. Whilst the FTSE remains at what are historically relatively high levels, this could be an appealing feature.
The use of averaging
When calculating the final level of the FTSE 100 Index the plan takes the average of the closing levels of the Index on each business day during the last 6 months of the plan term. The use of averaging can reduce the adverse effects of a falling market or sudden market falls whilst it can also reduce the benefits of an increasing market or sudden increases in the market during the last six months of the plan.
Since the plan is a structured deposit you will receive your initial deposit back in full should the plan mature early or after the six year term regardless of what happens to the FTSE 100 Index and as long as the deposit taker for the plan, Investec Bank Plc, is able to repay your money. The bank’s ability to stay solvent and repay your capital is known as counterparty risk and is the same risk you take with any capital deposited with an institution with a UK banking licence.
In the event that Investec is unable to meet its liabilities, the plan would come under the remit of the Financial Services Compensation Scheme deposit protection so savers could be eligible for compensation for up to £85,000 per person.
Investec Bank plc profile
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 as well as a further £22.6 billion of customer deposits and employ around 8,250 people. They specialise in a number of areas, particularly within the banking sector and are a leading provider of investment plans and structured deposits in the UK.
Returns not guaranteed
The potential for high returns must always be considered against the risk that the plan does not pay out. If the FTSE has fallen by 10% or more at the end of the plan term, you will only receive a return of your capital. In this situation you would have been better off with a fixed rate which would have provided a fixed return each year. This is the risk you take in order to have the potential for higher returns.
In addition to non-ISA deposits, this plan has been one of our most popular deposits with Cash ISA savers and is available as an ISA up to the current limit of £15,240. Therefore tax payers could benefit from a tax free growth return and with longer term Cash ISA fixed rates even lower around the 2.50% AER mark, this could be an appealing alternative. The plan also accepts transfers from both Cash ISAs and Stocks & Shares ISAs and has a low minimum deposit of £3,000.
Fair Investment view
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “There’s no getting around the fact that the rates on offer from traditional savings products are low and this continues to create a real challenge for savers. By combining capital protection with the potential for a high growth return, the latest version of the FTSE 100 Defensive Deposit Plan from Investec could be a compelling opportunity.”
He added: “The best long term fixed rate savings bonds are paying a little over 3% AER whilst by linking your deposit to the FTSE, if this Deposit pays out the 33% return is equivalent to around 4.85% AER. Both are treated the same for FSCS purposes (up to the usual deposit scheme limits) but unlike the fixed rate bond, the return on the Investec plan is dependent on the FTSE and is not therefore guaranteed. So if you are prepared to sacrifice a guaranteed rate of interest, then the potential for a high return even in a slightly falling market could be appealing in the current economic climate.”
AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.
Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
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.
The plan referred to in this article is a structured deposit plan that is capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial capital and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial deposit 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.