Type: Guaranteed equity bond
Aim: Growth linked to the performance of the FTSE 100 index
Minimum-maximum investment: 5,000-1m, Isa 7,000
Term: Six years
Return: 14% growth in the original investment at the end of year two, 21% at the end of year three, 28% at the end of year four and 35% at the end of year five if index is at least 7 per cent, 10.5%, 14% and 17.5% respectively above its initial level, otherwise 100% of the growth in the index at the end of the term
Guarantee: Original capital returned in full regardless of the performance of the index
Closing date: October 5, 2005, 2005, September 21, 205 for Pep/Isa transfers
Commission: Initial 3%
Tel: 01189 563193
Structured Solutions Groups Early Bonus Plan III is linked to the performance of the FTSE 100 index for a term of six years.
Arch Financial Planning managing director Arthur Childs points out that this product is managed by Keydata, which has launched over 30 structured products since its inception in 2001, which have attracted 800m of investments and 52,000 investors.
“This particular product has been put together by Zurich based West LB Bank – Westdeutsche Landesbank (Schweiz) AG – rated A by Standard & Poors. It is a third tranche of a six-year capital protected equity bond which has an early maturity feature triggered by the performance of the FTSE 100 index.,” says Childs.
Childs explains that if the index has risen by at least 7 per cent in year two, 10.5per cent in year three, 14 per cent in year four or 17.5 per cent in year five, the product will mature early, paying out 14 per cent, 21per cent, 28 per cent or 35 per cent of the capital invested respectively. If the early maturity feature is not triggered by the index performance, the bond will run its full six year term, paying out 100 per cent of the uncapped growth in the FTSE 100 index at the end of the period.
Discussing the target market for the product Childs says: “As investors will get their original capital back in full at the end of the term, or if earlier maturity takes place, this could be attractive to lower risk clients who may be overweight in cash and fixed interest investments.”
Childs also thinks the product is more tax efficient than some other lower risk products. He mentions that it is available within an Isa and even outside of an Isa the gain is taxable under capital gains tax rather than income tax, allowing the use of the annual exemption and taper relief. With an estimated 170,000 CGT payers in the UK, Childs thinks there are a lot of potential investors for whom the return would be completely tax free.
“Lower-risk clients are used to the idea of tying up some of their capital to achieve higher returns but the particular appeal here is that they may get those higher returns and still get access to their capital again in only two or three years,” says Childs. He regards the literature as attractive and clearly laid out.
Moving on to the features he dislikes Childs says: “Where an investor is prepared to put part of their capital into equities it is normally preferable for them to do so rather than use this type of product. The investor is sacrificing the dividend income which, in FTSE 100 companies, can be substantial. Investors are also forgoing any growth that is achieved above the trigger levels should the plan mature early. The averaging over the last year will put investors at a disadvantage in a rising market,” he says.
Childs also refers to a 100 plus VAT charge for Isa investors moving to another plan manager at the end of the term to retain their investment within an Isa. He feels the main competition will come from Keydatas Secure Income Bond but notes the income on the Keydata product is subject to income tax which is less favourable than CGT. He adds: “The Premier UK Growth Plan is very similar in structure with the same type of early maturity options but the return of capital is dependent on the index not falling by more than 50 per cent.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average