The new ISA allowance all wrapped up with tax free fixed income
For both savers and investors, the start of the new tax year brings with it a new and increased ISA allowance which is available to use now, even if you invested last year’s allowance right at the last minute. The Budget also brought with it an increased allowance available from 1st July but for those investors looking to make the most of the current increased allowance and to start receiving tax free income now, we take a look our most popular income plan during 2013 and the 2014 ISA season and compare it to some high yielding investment funds.
New ISA allowance available now
Further to the Budget, this year sees big changes for ISAs and it is very good news for investors as the full allowance will increase significantly to £15,000 on 1st July. Between now and then we also have a new ISA allowance of £11,880 with the same rules applying as for the last tax year – you can invest the full allowance in a stocks and shares ISA or save up to half (£5,940) in a cash ISA, investing the rest in a stocks and shares ISA. Remember, you are currently able to transfer Cash ISAs into Stocks and Shares ISA but not the other way around.
From 1st July, instead of having separate allowances for cash and investments there will be one new allowance of £15,000 each tax year and it will be up to you how much of this you put into cash and investments. Those who have used the £11,820 already will still be able to invest another £3,120 and transfers between cash and investment ISAs will become fully flexible and you will be able to move between the two unrestricted. By maximising your new ISA allowance as soon as possible you can benefit from tax free income straight away. So why wait?
Income seekers – does any of this ring true?
Whether you are experienced or new to investing, those needing income from their capital covers a wide range of savings scenarios, some of which may apply to you.
- I am working or retired and need to supplement my income
- I need income from my savings
- I have an instant access Cash ISA but the level of interest has dropped significantly
- I have an Investment ISA that is not yielding what it used to
- I have a maturing fixed rate Cash ISA and the equivalent rate is significantly lower for the same term again
- I would like a fixed and regular income from my capital
If any of these ring true, and provided you are prepared to put your capital at risk, then this fixed income investment might be what you are after.
In a nutshell
For those who wish to get the tax year off on the right foot, the Enhanced Income Plan from Investec was our most popular income plan during 2013 as well as during the 2014 ISA season. The current version offers investors a fixed income of 5.52% each year and pays income each month. Your capital is at risk should the FTSE 100 Index (‘the FTSE’) falls below 50% of its starting value during the 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.
A high fixed income
A fixed income is uncommon with investments which normally offer a variable income based on market conditions and the underlying investments. This is therefore a popular feature of the plan 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 5.52% fixed income is also paid tax free. This is equivalent to basic rate tax payers receiving 6.9% interest and higher rate tax payers 9.2%.
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 3%. This investment therefore offers a premium of 2.52% in return for putting your capital at risk.
Compared to investment funds
Some of the yields available from investment funds certainly catch the eye – see our selection of five bond funds paying at least 5% income. 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 a different 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. 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 (£11,880 limit), Cash and Investment ISA transfers and non-ISA investments with a minimum investment of £3,000.
Fair Investment Fund Supermarket
With over 2,100 funds from over 95 fund management groups, the Fair Investment Fund Supermarket offers a vast choice of income funds, many of which have 0% initial charge and low annual management charges, including low cost trackers, bond funds, UK equity income funds and managed funds.
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.