Written by Oliver Roylance-Smith
18th March 2015

Top 5 Income Investments for ISA Season

There is now less than one month to go until the end of the tax year, which means that if you do not use your valuable tax-free ISA allowance of £15,000 by the deadline on 5th April 2015, you will lose it forever. The hunt for income remains a top priority for many investors both at this time of year and into the new tax year, and with many of our income investments open to both current year and 2015/16 tax year ISA subscriptions, there should be something to appeal to many investors. To help you decide where to invest, we have put together our top 5 income investment selections. We also give you our in-house view of each from Oliver Roylance-Smith, our Head of Savings and Investments.

5.28% fixed income with monthly payments

With fixed income investment plans you know exactly what you will be paid, when and for how long, which has its obvious appeal for those looking to plan for the future and are seeking a regular and defined income. The Enhanced Income Plan from Investec was our most popular income investment during 2014 with the current issue paying 5.28% annual income regardless of what happens to the stock market. Since most yields on income investments are variable this is a distinct difference which in the current climate could make for an attractive income alternative.

The 5.28% annual income is paid as 0.44% each month, which is high when compared to typical yields currently being paid by UK equity income 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 some or all of your initial investment.

Fair Investment view: “5.28% tax free income (if held in an ISA) is the equivalent of 6.60% taxable income for a basic rate tax payer and 8.80% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with ongoing uncertainty around future interest rates and dividend yields, this plan offers a competitive balance of risk versus reward that could be considered by both savers and investors.”
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Up to 6.75% income per year, quarterly payments

The Morgan Stanley FTSE Income Accumulator Plan aims to provide a maximum potential quarterly income payment of 1.6875%, equivalent to 6.75% per year.  Income is accrued for each week the FSTE 100 closes between 5,000 and 8,000 points – if it closes outside of this range, no income will be added for that week. All accrued income is then paid out to you each quarter.

The plan also offers some capital protection against a falling stock market since unless the FTSE is below 4,000 points at the end of the term, your initial investment is returned in full. If the Index is lower, your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment view: “If you agree the FTSE 100 may well remain between 5,000 and 8,000 points in the coming years, this plan could be an attractive opportunity in the hunt for high income, especially when this can be paid tax-free if held within a New ISA.”
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7.50% p.a. fixed income, monthly payments

The FTSE 5 Monthly Income Plan from Meteor offers a fixed income, paid to you regardless of the performance of the stock market. The plan currently offers 7.50% annual income, paid as 0.625% each month. This level of fixed income is comparatively high when contrasted with some of the other plans on the market, the main reason being that the return of your initial capital is dependent on the performance of five FTSE 100 shares rather the Index as a whole. 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 fixed income on offer equates to a total return of 45% over the term of the investment and if you invest within an ISA, the 7.50% fixed income is equivalent to 9.375% p.a. for basic rate tax payers and 12.50% p.a. for higher rate tax payers. This investment might well appeal to income investors looking for a high level of fixed and regular income however, the fact that the return of your initial capital is based on the performance of five shares rather than the Index as a whole should be a key consideration.”
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Up to 9% income, quarterly payments

With opportunities for very high income from our capital hard to come by, the FTSE 4 Quarterly Income Plan from Focus Solutions (Credit Suisse acting as counterparty) has proved popular since its launch last year. The current version of the plan offers the potential for up to 9.48% annual income dependent on the performance of four FTSE 100 companies. An income payment of 2.37% 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: “This investment could be a timely addition for those seeking high yield investment opportunities and the fact that each share can fall up to 40% and investors still receive 9.48% income is a compelling feature. Investors should though consider carefully that both their income and the return of capital are based on the performance of four shares rather than the FTSE 100 Index.”
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Experienced Investors – up to 8.6% annual income, quarterly payments

For experienced investors  the recently launched Atlantic Phoenix Note from Cube Investing (Royal Bank of Canada acting as counterparty) offers the potential for up to 8.6% based on the performance of the FTSE 100 Index and the S&P 500 Index.  Both indices are measured at the start of the plan and then on a quarterly basis throughout. You will receive an income payment of 2.15% at the end of each quarter provided both Indices are at or above 80% of their Initial Index Levels – if either Index is below 80% of its value at the start of the plan, no income will be paid for that quarter. The Plan also offers the opportunity to mature early at the end of each quarter (from year 1 onwards) if both indices are at or above their starting levels, in which case your original capital is returned plus any final income payment.

If the plan does not mature early then as long as neither of the Indices has fallen by more than 40% at the end of the investment term, you will receive the full return of your original investment. However, if one or both Indices are below this 40% barrier, you will lose 1% of capital for every 1% the lowest performing Index has fallen, so you could lose some or all of their capital.

Fair Investment View:For experienced investors who understand the performance of the FTSE 100 Index and the S&P 500 and how they might correlate over time, this plan could offer an attractive balance of high income potential and conditional capital protection, with a return of capital even if both Indices fall up to 40%.”
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Compare Top 10 NISA 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. Different types of investment carry different levels of risk and may not be suitable for all investors. The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. 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 of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

Structured investment plans are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Any return on your investment is not guaranteed and there is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index, the S&P 500 Index or shares listed on the FTSE 100 Index. As shares prices can move by a wide margin plans based on the performance of shares represent a higher risk investment than those based on indices as a whole.

There is also 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 S&P 100 Index, the FTSE 100 Index and shares listed on the FTSE 100 Index is not a guide to their future performance.