Using your ISA to invest when the FTSE is high
With the FTSE recently passing its highest level on record, plans which offer the opportunity for investment level returns if the stock market only goes up a little, or even goes down slightly, may be of interest to many investors. By using your ISA allowance of £15,000 for 2014/2015, you could maximise the tax-free potential of any investment you make while the FTSE is high. Additionally, some investment ISAs allow you to invest next year’s ISA allowance of £15,240 at the same time, offering you the potential to invest up to £30,240 per individual (or £60,480 per couple), tax free.
The end of the tax year is fast approaching, so don’t delay. Applications must be received by us by Wednesday 1st April 2015.
Investments with the ability to mature early
One particular type of fixed term investment which seems to be popular in all kinds of market conditions is the autocall investment or ‘kick out’ as it is more commonly known. These investments have the ability to mature early thereby offering the potential for attractive returns after a relatively short period of time.
Whether the plan kicks out in the future is usually dependent on the FTSE being at a particular level at a particular date, which is then normally referenced to its level at the start of the investment. If it does not meet any of the required levels throughout the investment term, no returns will be paid and your capital may be at risk. The early maturity feature which is unique to these plans brings a new element to the investment opportunity and means that although your longer term view of the FTSE is important, so is your view on the potential for the FTSE year on year.
10.5% per year even if the FTSE rises by only a single point
Investec’s Enhanced Kick Out Plan currently offers the highest rate for an investment based on the FTSE 100 Index and will return 10.50% per year (not compounded) provided 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. The Plan has a 6 year term, but offers the opportunity to mature early after years 2, 3, 4 or 5. To achieve early maturity the average closing levels of the Index for the five business days up to and including one of the Kick-Out Dates must be higher than the Initial Index Level. 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.
The potential for 7.1% gross annual growth and early maturity
Societe Generale’s UK Step-Down Kick Out plan offers a headline 7.1% per annum provided the Index is at or above its required level each year, starting at 100% in year 2 and falling to 80% in the final year. The Plan has a 6 year term, but offers the opportunity to mature early after years 2, 3, 4 or 5. If on any Anniversary Date the Required Reference Level of the FTSE 100 Index is met, the Plan will mature early returning your original capital plus 7.1% gross for each year the plan has been active (not compounded). If the Required Reference Level is not met then the plan will continue until the following year. If conditions are not met on any of the Anniversary Dates you will receive no growth returns. Your capital is at risk if the FTSE falls by more than 40% at maturity and is below this 40% safety net barrier at the end of the plan, in which case you will lose 1% of capital for every 1% the Index has fallen below the starting level.
7.75% each year, even if the FTSE falls up to 10%
Finally, another plan from Investec, the Defensive Kick-Out Plan, offers 7.75% annual growth provided the FTSE finishes above 90% of its value at the start of the plan. The Plan has a 6 year term, but offers the opportunity to mature early after years 3, 4 or 5. If on any yearly Kick Out Dates from year 3 onwards, the closing level of the Index is above 90% of the Initial Index Level, the Plan will mature early and return your capital plus 7.75% gross times the number of years the Plan has been active. If the Plan runs for the full six years and conditions are met at the end of the term, then you will receive a return of capital plus 46.5%. If conditions are not met on any of the yearly Kick Out Dates, or at the end of year six you will receive no growth returns and return of your capital may be at risk. Your capital is at risk if the FTSE 100 Index falls by 50% or more, in which case you could lose some or all of your initial investment.
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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. 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.
These are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Growth returns are 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.
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 its future performance.
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.
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