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Why the 2%

Daniel Fenton, Lowes Financial Management

Following Investec’s new product launch on 3rd September 2018, Dan examines what brings about the difference in coupon between the Investec/Lowes 8:8 Plan 5 and the Investec FTSE 100 Kick-Out Deposit Plan 80.

Every plan offers an abundance of different features, and every aspect impacts the coupon positively or negatively, mostly through varying the level of risk – these two plans are no different: the Investec Lowes 8:8 Plan Issue 5 offers a coupon of 8% for each year that the plan is in force whereas the FTSE 100 Kick-Out Deposit Plan 80 offers investors an interest payment of 6% per annum. But why the 2% variation?

To begin, the 8:8 Plan puts capital at risk from market movements in that, if a positive maturity is not triggered and the FTSE 100 falls by more than 40% over the eight years term investors capital will be reduced by the same percentage. The FTSE 100 Kick-Out Deposit Plan 80 is however, as the name suggests, a deposit which means investors original capital is as good as guaranteed to be returned at maturity no matter what happens to the FTSE 100 Index throughout the term. Deposits are still vulnerable if the bank defaults, however they are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per investor, per institution. This level of protection comes at a cost to the coupon.

The 8:8 Plan has a potential maximum eight-year term which means that their money could be tied up for longer than the six-year deposit plan. The Deposit Plan has a maximum six-year term, meaning that investor’s money is potentially inaccessible for less time than the 8:8, however there are fewer opportunities to mature throughout the term. The auto-call feature of the 8:8 plan means that, from the second anniversary of the plan onwards, every six months there is an observation date which will lead to the plan maturing if the FTSE 100 is at or above 92% of its initial level. Therefore, there are more opportunities for the plan to mature (thirteen in total), compared to the FTSE 100 Kick-Out Deposit Plan 80 which offers yearly observations with the first on the third anniversary. So the first possible early maturity with the deposit is after three years, compared with two years for the 8:8 plan and whilst the latter has a total of 13 possible maturity points the deposit only has four.

The 8:8 Plan incorporates a defensive feature in that, for a maturity to occur the FTSE 100 must be at or above 92% of its initial index level on any of the observation dates. This works in tangent with the eight-year term as it both gives extra protection in case of a fall in the market, as well as providing longer time for the market to recover. The Deposit Plan however runs at-the-money, meaning that for the plan to mature the FTSE 100 index must be at or above the initial start level at any of the observation dates.

Finally, it is important to remember that both plans’ returns are also taxed differently; the 8:8 plan’s positive gains fall under Capital Gains Tax whereas, interest on deposits are taxed as income (which may be less advantageous for many investors).

We have judged these plans to be of sufficient quality to receive our ‘Preferred’ status, as we believe that, whilst different, each are amongst the best of its particular niche currently available in the UK retail space. They each have advantages and disadvantages, but every investment solution should fulfill a client need, and here at Lowes Financial Management we think these plans, amongst select others, could fulfill a need in our clients’ tailored investment portfolios.

The 8:8 Plan will put capital at risk