Top 3 income investment ISAs

With only a month to go, time is running out to maximise the valuable tax benefit of your ISA allowance before the deadline on 5th April 2014 – otherwise it is gone forever. The ISA allowance for the current tax year is £11,520 and up to half can be placed in a Cash ISA. For those looking to use some or all of this allowance, or perhaps transfer existing Cash ISAs or Investment ISAs, our head of savings and investment, Oliver Roylance-Smith, selects his top 3 income investments for this ISA season.

Top 3 selections

Our selection of income investments is based on the main features investors usually look for when it comes to finding the best income opportunities available, from high levels of income to regular payment frequencies. Our selections include a high yield investment offering up to 9% income, a unique fixed income investment offering 6% each year, paid to you whatever happens to the stock market, and a fixed term plan offering 7.2% income provided the FTSE remains above 3,900 points.

Income a top priority

With cash offering record low rates, even if you tie yourself in for the longer term, many savers are being forced to join income investors in the hunt for higher yields. Many income investors have historically looked to funds or an investment portfolio to provide an income, but with typical yields on UK equity income funds currently under 4%, this may not be providing the level of income required and investors will be questioning whether capital growth will do enough to boost their overall returns.

Defined return, defined risk

This is why we choose to feature fixed term investments, which offer a defined return for a defined level of risk, with conditional capital protection one of the main appeals. Rather than having your capital exposed to day to day stock market risk, these plans will return your initial capital at the end of the term unless the FTSE has fallen by more than 50%, or finishes below a level specified at the outset, e.g. 3,900 points, in which case your capital will be at risk. Investors can then decide based on the likelihood of this happening in combination with the income on offer.

ISA transfers and tax free income

All three investments featured accept new ISA investments, ISA transfers and non-ISA investments. Remember, Cash ISAs can now be transferred to Stocks & Shares ISAs which opens up another option for savers who are having to face the impact of record low savings rates. The income paid from an investment held within an ISA is not then subject to tax, thereby resulting in the potential for an attractive stream of tax free income.

Please note that Stocks & Shares ISAs put your capital at risk and if you transfer a Cash ISA to a Stocks & Shares ISA you cannot then move it back into a Cash ISA at a later date. Always check whether any charges apply on transfers and remember that the preferential tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future.

6% fixed income, monthly payments

The Enhanced Income Plan from Investec was our most popular income investment in 2013 and continues to be a best seller. The main appeal of the plan is that it offers a fixed income which is paid to you each month, regardless of the performance of the FTSE 100 Index. The annual income is currently 6% (paid as 0.5% each month) which is high when compared to current typical yields on investment funds. Capital is at risk if the FTSE drops by more than 50% during the plan and fails to recover by the end of the term, in which case your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “The high level of fixed income and the monthly payment frequency are popular features which, when combined with a fixed term, provides an investment with an attractive degree of certainty in those areas. With the uncertain outlook for interest rates and dividend yields, this plan could offer a competitive balance of risk versus reward that could be considered by both savers and investors”

Please note that the Investec plan can accept new ISA applications for both the current tax year as well as the 2014/15 tax year (ISA allowance of £11,880. Application deadlines apply.

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Up to 9% income, quarterly payments

With opportunities for very high income from our capital hard to come by, the recently launched FTSE 4 Quarterly Income Plan from Focus Solutions (Credit Suisse acting as counterparty) has already created significant interest. The plan offers the potential for up to 9% annual income dependent on the performance of four FTSE 100 companies. An income payment of 2.25% is made each quarter provided the value of all four shares is at or above 60% of their value at the start of the investment. However, if one or more shares are below this level, no income payment will be made for that quarter. The return of your initial investment also depends on the performance of the same four shares. On the final day of your investment should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.

Fair Investment view: “The 60% barrier means that each share can fall up to 40% and investors still receive 9% income is a compelling feature but the fact that income and the return of capital are based on the performance of four shares should be a key consideration. With typical yields on UK equity income funds under 4%, this investment could be a timely addition to those seeking high yield investment opportunities.”

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7.2% income provided the FTSE remains above 3,900 points

Our experienced investor section contains a number of investment opportunities for our existing investors and those who have experience of putting their capital at risk. One of our most popular is the Enhanced Income Builder from Gilliat which offers up to 7.2% each year with income accruing for each Friday during the term that the FTSE 100 closes above 3,900 points – if it closes below this level, no income will be added for that week. All accrued income is then paid out each quarter. Your capital is at risk if the value of the FTSE on the last day of the investment is below the same 3,900 point barrier, in which case your initial capital will be reduced by the equivalent drop in the Index, so you could lose some or all of your initial investment.

Fair Investment view: “If you are looking for the potential for a high level of income and you are confident the FTSE 100 will remain above 3,900 points in the coming years, the Enhanced Income Builder is a worthy contender. Due to the gap between the recent levels of the FTSE and the 3,900 point floor, this plan combines the potential for a high yield with some capital protection against a falling market”.

Please note that past performance of the FTSE 100 is not a guide to future returns.

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No annual management charges

All of the ongoing charges associated with each plan are taken into account in the headline return so there are no annual management charges and no hidden surprises. This should be compared to a typical UK equity fund or portfolio which will often have total annual charges in excess of 1%. This annual cost associated with the management of funds perhaps helps to explain the number of funds which find it difficult to outperform the FTSE, especially over the medium term. This ongoing cost is not a feature of fixed term investments.

Discounts for larger investments

Discounts are also available for larger investments. Please click on the ‘more information’ links below to find out more.

Limited offers

Since these investments are normally offered for a limited period, please always note the ISA transfer and new investment deadlines for applications into the current issue.

Remember the total return

The market for income investments can be full of attractive yields but it is important to fully understand how each investment works and the risks it entails. Whether this is inflation risk, risk of capital loss or the risk of fluctuating yields, it should always be remembered that it is the income and capital loss/rise combined that produce your overall return.

Savers looking for investment alternatives

With savings rates continuing at historically low levels and inflation rising, there is sizeable pressure mounting on savers to seriously consider what is the best home for their money. If you are considering the need to move some of your capital into investments or are considering additional investments or ISA transfers, these investments could each offer a compelling opportunity to potentially provide a competitive level of income while offering your initial capital some protection against a falling market.

However, unlike savings plans, investing inevitably puts your capital at risk and so unless you are prepared to lose some or all of your capital, this should not be an option.

Investment plans

As an alternative to open ended investment funds, the defined return and defined risk offered by fixed term investments can offer investors a different approach to achieving potential income. Their conditional capital protection also means that your initial investment has some protection against a falling market since the FTSE 100 usually needs to fall by more than 50% before your capital is at risk. Combined with either a fixed or variable income and these plans can offer an attractive balance of risk versus reward.

Compared to investment funds

Some of the yields available from investment funds certainly catch the eye but it is important to remember that this income is not guaranteed and is subject to fluctuations. In addition, 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 9% income yield is compelling in its own right but not so if it coincides with a 9% reduction in the value of your capital. However, this can of course work in your favour if capital growth is positive.

Fair Investment conclusion – 5 reasons to consider

Our Top 5 reasons to consider our income selections:

1. High levels of income on offer – 6% fixed or up to 9% yield
2. Monthly or quarterly income – regular payments to help supplement existing income
3. Fixed term – know exactly what income is on offer and for how long
4. Conditional capital protection – offering some protection against a falling market
5. ISA eligible – make full use of your ISA allowance and transfer existing ISAs to receive tax free income

Click here for more information about the Investec Enhanced Income Plan »

Click here for more information about the Focus FTSE 4 Quarterly Income Plan »

Click here for more information about the Gilliat Enhanced income Builder »

Compare more income investments »

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 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.

These are structured investment plans which are not capital protected and are 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 or any shares listed within the Index is not a guide to future returns.

Written by Oliver Roylance-Smith ,
4th March 2014