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Blue Sky’s income plan waits in the corridor

Blue Sky Asset Management has brought out a structured product that provides income of 3.5 per cent every six months during a five year term, depending on the performance of the FSTE 100 index.

The high income corridor auto-call plan IV depends on the index remaining in a range, or corridor, of 90 to 105 per cent of its starting level at each six month point during the term.

Investors will receive an initial 3.5 per cent income payment after the first six months regardless of the index performance. Further income payments at each six-month internal will depend on the index being at or above 90 per cent of its initial value, but not more than 105 per cent. This means the index can fall by up to 10 per cent without impacting on income payments. However, if the index has risen to 105 per cent or more above its initial value, the product will terminate at that point and return the original capital in full.

If the index does not terminate early, investors will get a full capital return at maturity unless the index falls by more than 50 per cent below its initial value by the final day of the term. If it breaches this barrier, investors will lose 1 per cent of their capital for every 1 per cent fall in the index.

Five-year FTSE 100 linked plans are available from Jubilee and Cater Allen, but neither has an early maturity feature. The returns are paid on a quarterly and annual basis respectively, with both providing potential income of 6.5 per cent a year.

However, Jubilee pays income regardless of index performance but puts the original capital at risk if the index falls by 50 per cent or more at maturity. Cater Allen will pay income only if the index does not fall below its initial value at each annual observation date, but provides full capital protection at maturity. Blue Sky takes the middle path in that it allows falls of up to 10 per cent to occur before income payments and its 50 per cent capital protection barrier will only come in to play if it has not matured early.

However, some investors may not like the uncertainty of how long they will receive income from the plan.

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