Top 10 reasons why kick out plans are proving so popular
Kick out plans have the ability to mature early or ‘kick out’ based on the performance of an underlying investment, often the FTSE 100 Index. So while many savers and investors find it difficult to commit their capital when stock markets trade at historically high levels, kick out plans can provide investment level returns if the market stays relatively flat, or even if the market goes down, and so have proved particularly popular in the current investment climate.
They are available as a capital protected deposit, or a capital at risk investment and as such have become popular with both savers and investors. With their popularity continuing to rise, we give you our Top 10 reasons to consider this type of plan.
1. Defined return v defined risk
With kick out plans the potential returns on offer as well as what needs to happen to provide these returns is known before you commit your capital – a defined return for a defined level of risk. The investor therefore has the benefit of knowing at the outset the conditions that need to be met in order to provide the stated returns, which can then be used to make an informed decision about whether to proceed or not by comparing with alternative investments as well as the returns available from cash savings.
2. Early maturity
The term ‘kick out’ refers to the ability of the plan to mature early depending on the movement of the underlying investment, often the FTSE 100 Index. Plans that have the ability to mature early and provide a competitive return on your capital have proved popular with investors in all types of markets
The fact that investors can achieve investment level returns even if the market stays relatively flat could also be why this investment has proved particularly popular while the FTSE remains at historically high levels.
3. Potential for high returns
In addition to the opportunity for early maturity it is no doubt the potential for high returns that have added to the popularity of kick out plans. With returns of up to 10.5% for plans linked to the performance of the FTSE 100 Index, the opportunity for double digit returns, even if the market stays relatively flat, has an obvious appeal. Note that the headline return is not compounded, but will be paid to you for each year the investment has been in place.
For those looking for the potential for higher returns, there are also plans linked to the performance of more than one Index, for example the FTSE 100 and the S&P 500, or linked to the performance of a small number of shares. The rule of thumb here is the greater the potential reward, the greater the risk to capital.
4. Potential to beat the market
Most kick out plans will mature early if the level of the FTSE (or other underlying investment) at the end of each year is higher than its value at the start of the plan, with the end of year value sometimes subject to some sort of averaging such as the average of the last five days of trading. This means that even if the FTSE has only gone up by a small amount, you would still receive the full growth rate thereby offering the opportunity to outperform the market. If the plan produces a return your initial capital is returned to you in full along with the growth payment.
5. ‘Defensive’ plans
In addition to those investments which kick out in the event that the FTSE (or other underlying investment) is higher at the end of each year, there are also plans that will still provide investment level returns even if the Index falls slightly, thereby catering for varying investor views of what will happen to the stock market in the coming years. With the FTSE at historically high levels, this has proved to be a popular feature.
6. Some capital protection from a falling market
Your original capital is returned if the plan kicks out but should this not occur, typically your capital will be returned provided the FTSE has not fallen below 50% of its value at the start of the plan. To put this into context, based on this morning’s opening value of 6,825.3, the Index would have to fall to a closing level of 3,412.7 before your capital would be at risk, a level not seen since the middle of 1995. However, if it does fall below 50% you could lose some or all of your initial capital. Please also remember that past performance is not a guide to future performance.
7. Fully capital protected options
This type of plan is also available with full capital protection, thereby offering the potential for returns which are higher than those currently available from the more traditional fixed rate bond as well as Financial Services Compensation Scheme eligibility up to the prevailing deposit limits (currently £85,000 per individual per institution). However, it should be remembered that unlike fixed rate bonds the returns on these are not guaranteed.
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8. No annual management charges
Unlike investment funds, the charges for creating and managing kick out plans are already taken into account so there are no annual management charges which come out of the headline return. The costs associated with the management of funds happens each and every year (in both actively managed and tracker funds), which may help to explain the number of funds which fail to outperform the FTSE 100 Index or other benchmark, especially over a five year period. This ongoing cost is not a feature of kick out plans. Most kick out investments will though have an initial charge, normally up to a maximum of 3%.
9. Tax efficient – New ISA friendly
In addition to non-ISA investments, all of the kick out plans offered through Fair Investment Company are available to individuals as a New ISA up to the current limit of £15,000 and will also accept transfers from both Cash ISAs and Stocks & Shares ISAs. Please note that the tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future.
10. A disciplined approach
The mechanics of these investments removes the need for the investor to worry about when to come out of the market since the decision is made for them by the pre-determined market conditions required for the plan to mature. When the plan matures, the investor then has the opportunity to reassess their options.
Counterparty risk
Your investment into a kick out plans is used to purchase securities issued by a counterparty which is normally a bank. This means that your investment is held with a single institution rather than split between a number of companies (as it would be within a fund), and so the risk of them being unable to repay your original investment along with any stated returns becomes a factor to consider – this is known as counterparty risk. Since the counterparty is usually a bank, the credit rating is normally available so a view can be taken on the potential risk involved. There are also plans which aim to reduce this counterparty risk by spreading it across a number of institutions.
Fair Investment view
Commenting on kick outs as a potential plan to consider, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With markets continuing to make investors think very carefully before committing their capital, kick out plans have proved to be a popular choice by offering an often compelling balance of risk v reward”.
He continued: “Although they should be considered fixed term plans, the opportunity to mature early, sometimes in as little as 12 months, is clearly an appealing feature for both savers and investors. Combined with the investment level returns on offers, even if the market stays relatively flat or even goes down, and it is understandable why this type of investment could be seen as an attractive opportunity in any investment climate, but especially when markets continue to trade at historically high levels.”
Current market offering
Kick out investment plans offer the potential for high returns balanced with conditional capital protection and the current market covers a wide range of counterparties, collateralised versions and ‘defensive’ plans which aim to reflect the prevailing market conditions. This gives a variety of plans from a number of different providers allowing the investor plenty of choice.
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Experienced investor section
We also have a number of kick out investments for our existing customers and those more experienced investors where you will find a range of dual Index plans which offer a higher risk versus reward, with current headline returns of up to 30% annual growth.
Click here for our experienced investor section »
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 may change. Make sure you check whether any charges apply prior to transferring any existing investment.
Different types of investment carry different levels of risk and may not be suitable for all investors. Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. 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 which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested 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 their future performance.