Investec Kick Out - Should I?

SarahSH_2

My (useless) Financial Advisor is telling me to invest in the above scheme (the one where, if the FT100 goes up by one point on the annivesary of the investment, you make 7.5% and then they kick you out - up to 5 years - or you are guaranteed initial investment back). As it's guaranteed by the £50K thing, I am tempted and don't need the money in the next 5 years.
Can anyone offer me any other info on this and whether they think it's a good thing to do? I think I've understood all the small print!

G_M

Sounds like a weird investment choice. Let's face it, over 5 years the FT100 is going to rise. Just invest.

BTW if you DO go for this you can get 2.5 discount on it by buying here. Though this seems to offer 15%, not 7.5%

SnowMan

I would ignore your adviser's advice.

This is an awful product designed to look good value (7.25% return) but in reality it can only be offered because it is NOT good value. The provider can put profit margins into the product because calculating its underlying value is so complex. This product pays 3% commission which is very attractive for the adviser and is effectively priced into the product and being paid by you. That is a lot of money for an investment that might only last 1 year and if it lasts more than 1 year then you are in real danger of not getting any return at all.

These products prey on the misconception that preserving the nominal value of capital is the important thing, in practice preserving the real value of capital (i.e. allowing for inflation) is more important in most cases. So not getting any return over 5 years is a really bad result.

The danger with this product is that the FT100 falls in year 1 and never returns above the initial level. Note that if the FT100 falls in year one then in year 2 not only does the FT100 have to rise, but it has to rise by more than it fell the previous year so you are perhaps into odds of not that much above 1 in 4 of recovering the situation in year 2. And by that stage there is a real danger of the FT100 never reaching its initial level over the 5 years.

Incidentally if the FT100 only exceeds its initial level in year 5 the actual return is only 6.4% per annum (because you need to allow for compounding). Note the return is treated as income and taxed as per savings interest under this product.

Special_Saver2

Hi Folks,

I followed the links that G_M provided and saw this...

http://moneyworld.com/Income_Bonds/Investec/Enhanced-Kickout-Plan/index.htm

Full repayment of your initial investment is not guaranteed: Your initial investment is at risk on a one-for-one basis if the FTSE 100 falls below 50% of its Initial Index Level at any point during the Investment Term and the Final Index Level is less than the Initial Index Level at the Final Maturity Date. If the FTSE 100 does not fall below 50% of its Initial Index Level throughout the Investment Term, your initial Plan investment is protected at maturity.

and this

http://moneyworld.com/Income_Bonds/Investec/Enhanced-Kickout-Plan/RISKS.htm

At the Investment Date your money will be pooled and transferred to an account at Investec Bank plc. There is a risk that Investec Bank plc may fail to meet its obligations during this period. In the event of Investec Bank plc’s insolvency your money will not be protected and you will have no right of recourse to the Financial Services Compensation Scheme. You may lose all or part of your initial investment.

SnowMan

Sarahsh, I presume your adviser has supplied you with the probabilities that the FT100 will first be higher in year 1, year 2, year 3, year 4, year 5, won't be higher over the 5 years.

If he or she hasn't provided you with these 6 probabilities then I do not see how it is possible to advise you to invest in this.

SnowMan

Special_Saver2 wrote: »

Full repayment of your initial investment is not guaranteed: Your initial investment is at risk on a one-for-one basis if the FTSE 100 falls below 50% of its Initial Index Level at any point during the Investment Term and the Final Index Level is less than the Initial Index Level at the Final Maturity Date. If the FTSE 100 does not fall below 50% of its Initial Index Level throughout the Investment Term, your initial Plan investment is protected at maturity.

:T

Under the 7.25% plan the capital is guaranteed (regardless of FTSE 100 fall) but this is a real sting in the tail under the enhanced plan, as is the other protection issue.

Does this remind you of the roulette stategy where you put a stake on red. If it comes up black you double your stake and bet again. And so on until you win...............

:rotfl:

jamesd

Note that Investec's bank is now just above junk status.

With Investec as the counterparty you might as well go for the product with the higher return and protection only down to 50% of the FTSE. You're taking investment risk anyway so you might as well get the higher return that's potentially available for those taking investment risk.

You should also find out what the start date is for the value of the index. If it's today it's a lot higher than if the product was launched a month ago and uses the index value from then.

What you're missing with index-related products like this is dividends. Those may be in the 3-5% range this year for the FTSE.

You can get corporate bond funds that are paying out around 10% at the moment. You might consider mixing some of those into the mixture. However, the Investec products probably pay out as a capital gain while the bonds pay out as interest, a difference that may be significant since CGT has the annual allowance and then 18% rate.

SarahSH_2

No, he hasn't given me any of that probability stuff! Would a decent IFA do that sort of thing? And presumably, risk putting me off the product.

SarahSH_2

Hi jamesd, I'm just too scared to go for proper stocks and shares things at the moment. I don't really understand enough and wouldn't know where to start which is why I was initally attracted to the relatively safe Investec thing. Could I have all you guys as my IFA please?

SarahSH_2

the Investec products probably pay out as a capital gain while the bonds pay out as interest, a difference that may be significant since CGT has the annual allowance and then 18% rate.[/QUOTE]

I understood I would get taxed as interest - as you can use the investment as a cash ISA (but I've used mine already) so I presume it wouldn't be CGT.

Reaper

Although these sort of plans don't have many fans round here (and that includes me) they are not necessarily a bad option if you are looking for growth better than a building society, don't want to invest in shares, and are willing to tie up the money for 5 years.

There have been other threads on similar Investec products. That thread mentions the Investec FTSE 100 and RPI Combination Plan 7 which doesn't sound bad - better than this one anyway.

However these sort of plans do have lots of small print and catches which your Financial Adviser needs to make sure you understand fully before you sign up.