Last updated: 10/11/2015
Whilst the stock market remains as volatile as ever, there is one type of investment plan that continues to be a popular choice with our investors. Kick out plans offer a defined return for a defined level of risk, which combined with the opportunity to mature early seems to make them particularly sought after in the current climate. Whilst many investors find it harder to commit when markets are seemingly more unpredictable than normal, we have seen a recent increase in the number of new investments into this type of plan and since they are available as a capital protected deposit or a capital at risk investment, have become popular with both savers and investors. With this in mind, we give you our Top 10 reasons to consider a kick out plan.
Defined return, defined risk
With kick out plans the potential returns on offer as well as what needs to happen to provide these returns is known up front, 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. This can be used to make an informed decision about whether to invest or not.
Early maturity
These plans have a maximum fixed term or normally six years, but the term ‘kick out’ refers to their ability to mature early depending on the movement of the underlying investment, such as the FTSE 100 Index. Plans that have the ability to mature early thereby providing an attractive level of growth along with a full return of your initial capital have proved popular with investors in all types of markets.
Potential for high returns
In addition to the opportunity for early maturity it is no doubt the potential for high growth returns that contribute to the ongoing popularity of kick out plans. With a number of plans offering the potential for double digit returns for each year invested (not compounded), the opportunity can be a compelling one, especially since what has to happen to the markets in order to provide these returns is known at outset.
Return on investment even if the market stays flat
A small number of plans offer returns only if the market goes up slightly but the majority offer the potential for a competitive growth return (up to 10.0%) even if the stock market stays the same. So if you’re not convinced the markets will rise in the future and yet still wish to achieve stock market level returns, this could be a compelling investment story and is perhaps why this type of investment has proved particularly popular while the FTSE still remains at what are historically high levels.
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Potential to beat the market
Should a kick out plan be designed to mature early provided the level of the FTSE 100 Index (or other underlying investment) at the end of each year is higher than its value at the start of the plan, then provided the Index has gone up, even if this is by a small amount, you will receive the headline return along with a full repayment of your initial capital. If the stock market had only risen by a very small amount then it is likely that this type of investment would have outperformed the market.
Investment level returns even if the market falls slightly
There are also kick out plans that will provide competitive growth returns even if the underlying investment falls slightly, for example up to 10% or 15%. These so called ‘defensive’ kick out plans thereby cater for a wider range of investor views as to what could happen to the stock market in the coming years. With current plans offering the potential for double digit returns, and whilst the FTSE has remained at historically high levels, this has proved to be a popular feature.
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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 underlying investment has not fallen below a certain amount, which is normally a percentage of its value at the start of the plan. To put this into context, for a plan which offers a return of capital unless the FTSE falls by more than 50%, then based on this morning’s opening value of 5,958.9, the Index would have to fall to a closing level of 2,979.5 before your capital would be at risk, a level not seen since 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.
Fully capital protected options
Some kick out plans are also available with full capital protection, known as structured deposits. These therefore offer 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, reducing to £75,000 from 1st January 2016 onwards). However, it should be remembered that unlike fixed rate bonds the returns on these are not guaranteed.
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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 or six 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%.
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 £15,240 (2015/16 tax year) 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.
Understand counterparty risk
One of the main differences with structured investment plans when compared with other types of investments, such as funds or investment trusts, is that your capital is used to purchase securities and it is these securities which are designed to produce the stated returns on offer. These securities are normally issued by a bank which means that your investment is held with a single institution rather than split between a number of companies, as it would be within an investment fund. This means the risk of the bank becoming insolvent and therefore 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 versus 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 potential for high investment returns, even if the market stays relatively flat or in some cases 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.”
Latest selections
Kick out investment plans offer the potential for high returns balanced with conditional capital protection, with our latest selections offering a wide range of counterparties, collateralised versions as well as ‘defensive’ plans giving investors plenty of choice. 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 15% after 12 months.
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Click here for the latest defensive kick out investments »
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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.
Although structured deposit plans are capital protected 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 this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. 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.
Kick out investment plans are structured investment plans that 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 is not a guide to their future performance.