Top 5 growth 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 5 growth investments for this ISA season.
High growth opportunities
Investors looking to gain a broad exposure to the UK stock market often look to investments linked to the performance of the FTSE 100 Index. But with the FTSE 100 at its current levels, investors considering their options are often split down the middle – on the one side are those who feel confident that the Index can break through the 7,000 point barrier for the first time and keep going, and then there are those who remain uncertain that the market can continue to rise.
Top 5 selections
With this in mind, our selection of growth investments encompass a range of views and offer opportunities whether you think the market will stay relatively flat, go up over time, and plans that will produce investment level returns even if the market goes down – so there should be something for all investors to think about. With potential returns of up to 12.5% there are some high headline returns on offer, some of which could be realised as early as year one of the investment.
‘Kick out’ plans remain popular
Four of the five plans featured are kick out plans which remain popular due to their ability to adapt and offer the potential for investment level returns in all types of market conditions, most noticeably even if the market remains flat or goes down.
The key feature of these investments is that although they should be considered a medium term investment, up to six years, they can also mature early or ‘kick out’, some as early as year one onwards, thereby offering the potential for attractive returns after a relatively short period of time.
Defined return, defined risk
All of the investments featured are fixed term investments, which offer a defined return for a defined level of risk. This means that you know the exact terms of the plan prior to investing and exactly what needs to happen in order to provide the stated return.
Another feature is that all of the investments contain conditional capital protection, so 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 underlying investment (either the FTSE 100 or a number of shares listed within the Index) has fallen by more than 50% in which case your capital is at risk. Investors can then decide to invest based on the likelihood of this happening in combination with the growth potential on offer.
ISA transfers and tax free growth
All of the plans 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. Any growth received from an investment held within an ISA is not then subject to tax, thereby resulting in the potential for attractive tax free growth.
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 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.
The Enhanced Kick Out Plan from Investec offers the highest rate for an investment based on the FTSE 100 Index and will return 9.5% per year (not compounded) provide the value of the Index at the end of each year is higher than its value at the start of the plan – so although the FTSE does have to rise, this only needs to be by a single point. Your initial capital is at risk if the Index falls by more than 50% during the term and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall – arguably this is a fair trade off for the potential to beat the market if the Index only rises a little.
Fair Investment view: “Knowing how to invest when the FTSE is high continues to be a challenge for investors, but with the potential for high returns as early as year 1, even if the FTSE only rises by a single point, perhaps hales to explain why this was our best selling kick out plan in 2013. For those looking for investment ideas when the FTSE is high, the combination of high growth potential and the ability to mature early could make for a compelling opportunity in the current market.”
Please note that this 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.
The potential for higher returns is available to investors prepared to link their investment to the performance of four FTSE 100 companies (Aviva, BP, HSBC and Vodafone) rather than the Index itself. The Four Stock Step Down Plan from Gilliat offers 12.2% for each year invested provided the value of all four shares is at or above the required level at the end of each six month period, starting from the end of year one. The required levels are 95% of their starting values at the end of year one, decreasing each year to 70% in the final year.
If one or more shares are lower, the plan continues and if no investment return is achieved, the return of your initial capital is also dependent 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, so you could lose some or all of your initial investment.
Fair Investment view: “The opportunity for double digit returns from our capital is always worth a closer look and the ability for each share to fall up to 30% over the term and for investors to still receive 12.2% annual returns is a compelling feature. However, the fact that any growth and the return of capital are based on the performance of four shares means this is a higher risk investment and should be a key consideration.”
Investec’s Defensive Kick-Out Plan arguably offers the best of both worlds by combining the potential for investment level returns even if the Index falls up to 10%. The investment has a 7% headline return and will kick out at the end of each year, from year two onwards, provided the FTSE finishes above 90% of its value at the start of the plan. This investment could therefore have the following outcomes in 2 year’s time:
- the FTSE has risen 30%, you receive 14%;
- the FTSE has risen 10%, you receive 14%;
- the FTSE is at the same level, you receive 14%;
- the FTSE has fallen almost 10%, you receive 14%;
- the FTSE has fallen by more than 10%, your investment continues to the next year.
The plan’s conditional capital protection means that your initial investment is returned in full unless the FTSE 100 falls by more than 50% during the term and is also below 90% of its starting value at the end of the 6 year term. If it is, your initial capital will be reduced by the same amount as the fall in the Index, so you could lose some or all of your initial investment.
Fair Investment view: “With the FTSE 100 reaching close to its all time high, it is understandable that investors may be thinking twice before committing their capital. For those investors who are not confident that the FTSE will continue to rise, or would like the potential for a competitive return even if it falls up to 10%, this plan could offer a compelling balance of risk versus reward.”
Please note that this 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.
Following this defensive theme is a recently launched plan from Morgan Stanley which offers a return linked to any rise in the FTSE 100 Index over the six year term, which is then multiplied by 2.4. The main feature of the FTSE Defensive Supertracker is that the growth is based on 90% of the FTSE’s starting value – so, for example, if the FTSE fell 5% you would still receive a 12% return (5% x 2.4), and if it rose by 10% you would receive a 48% return (20% x 2.4). The maximum return is capped at 72% of your initial investment.
If the plan does not kick out and the FTSE is below 10% on the final day of plan, no growth will be paid and your original investment will be returned in full unless the FTSE has fallen by more than 50%. If it has, your 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: “This plan could be a compelling opportunity for investors concerned about the historically high level of the FTSE and would therefore like to include a defensive element to their investment. By receiving well over double any rise in the Index, the plan also offers investors the opportunity to beat the stock market. The maximum growth return of 72% is equivalent to just under 9.5% compound annual growth.”
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. For those looking for the potential for double digit growth returns there are a range of plans which combine more than one Index in the underlying investment in order to create higher growth opportunities.
One of our most popular is the Dual Index Enhanced Kick Out Plan from Investec where your returns are dependent on the performance of the FTSE 100 Index and the S&P 500 Index. If both Indices at the end of each year (from year 1 onwards) are higher than their values at the start of the plan, the plan will return 12.5% for each year invested (not compounded). Capital is returned provided both Indices finish above 50% of their starting values but if one or more Index finishes below this level, your initial investment is reduced by the same percentage as the worse performing Index, so your capital is at risk.
Fair Investment view: “The opportunity to receive 12.5% in as early as 12 months is a compelling one but since any growth and the return of your initial capital is based on the performance of both the FTSE 100 Index and the S&P 500, investors should understand the correlation between these two indices before proceeding.”
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 therefore 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.
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.
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.