Savings Focus: Investec Kick Out Deposit Plan
The challenging environment for savers continues as more and more of us are being forced to face the truth about the impact of record low interest rates on our savings and our future. With the current market for traditional fixed rates offering 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 the Kick Out Deposit Plan from Investec Bank to find out why this particular plan has been proving so popular.
Traditional savings rates underperforming
The current economic environment is as challenging as it’s ever been and those that are feeling it most are savers looking for a competitive net return once tax and inflation are taken into account. Unfortunately traditional savings rates are failing to deliver with both instant access and fixed rate bonds continuing to offer record low rates.
Leading one year fixed rate bonds currently offer around 1.9%, three year fixed rates around 2.5% and up to 3% is on offer if you can fix for five years. Top deals a year ago would have secured you 2%, 2.55% and 3.15% over these same terms and so the current best buys are even lower than they were 12 months ago. As for instant access accounts, these are currently paying a paltry 1.50% AER and so all but non-taxpayers are losing money in real terms despite the headline rate of inflation standing well below the Bank of England’s 2% target.
Potential return of 4.75% each year
Just three years ago you could get 3.15% from an instant access account, a rate you can’t get now even if you are prepared to tie your money up for five years. This is perhaps why interest in the wider range of options available to savers has grown in recent years. Structured deposits offer the potential to beat cash returns but with full capital protection and the Kick Out Deposit Plan from Investec is one such plan that is proving to be one of our most popular this year.
The plan protects your initial deposit whilst aiming to provide a return of 4.75% each year (not compounded). You will receive this return provided the value of the FTSE 100 at the end of each year from year 3 onwards is higher than its value at the start of the plan. The maximum term the plan can run for is six years but it has the potential to mature early or ‘kick out’ from year 3 onwards.
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 for each of the five business days up to and including the final day at the end of each year from year 3 onwards. 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 each five day measurement period.
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 license.
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, they currently employ around 8,200 people and as at April 2014, look after £109.9 billion of third party assets under management. 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 £11.1 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.
The potential for higher returns
When compared to the overall savings market and the options on offer, the potential 4.75% for each year the plan is in place is a high return, especially as this could be achieved after just 3 years. Market leading three year fixed rates are currently offering around 2.5% so the potential upside should the plan kick out early is a compelling one. Even if the plan runs for four or five years, the potential returns still offer a premium when compared with leading fixed rates of similar duration.
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 fails to finish higher at the end of each year, you will only receive a return of your capital at the end of the 6 year term. 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.
New ISA friendly
In addition to non-ISA deposits, this plan has been one of our most popular with Cash ISA savers and is available as a New ISA up to the current limit of £15,000, and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs. The minimum investment is £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 serious situation for savers. The latest version of the Kick Out Deposit plan from Investec is one of the few fixed term deposits on the market that can mature early and with a headline of 4.75% per year available as early as year 3, offers the potential for a healthy premium when compared with fixed rates currently on offer.”
He concluded: “If you are prepared to sacrifice a guaranteed return, then the potential for a high return coupled with full protection of your capital is something which seems to fit within the current economic climate and the ongoing needs of savers.”
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.