If the FTSE 100 index rises by only 7 per cent over a six-year period, then this plan will pay out a profit of 84 per cent, that is, 12 times 7 per cent, with very little downside risk.
This plan is attractive at the moment because stockmarket valuations are still realistic and the market appears to be settling down.
If the FTSE goes up by more than 7 per cent, there will be no further increase in profits. However, if the market goes up by, say, only 5 per cent over the whole period, then the return will be 12 times 5 per cent, that is, 60 per cent in total.
If the market stays the same or goes down by up to 50 per cent, investors’ capital will be returned in full. If it goes down by more than that, the capital return will be 1 per cent less for each 1 per cent fall in the FTSE 100. For example, if the FTSE 100 goes down by 60 per cent and does not recover, then investors will get 40 per cent of their money back.
Therefore, unless a major disaster happens, it is likely that investors will receive a return of over 10.5 per cent a year compound on their money, which is unlikely to be exceeded by an average portfolio over the same period. This plan also has a much lower downside risk.
The plan is tax-free through Peps, Isas, self-invested personal pensions and small self-administered schemes and is subject to capital gains tax only on direct investments. However, even here, taper relief means that tax-free gains of up to £11,500 can be made, assuming that the capital gains tax allowance of £9,200 is not increased and 20 per cent taper relief remains.
This means a married couple could invest over £27,000 and not pay capital gains tax on £23,000 profit. This plan must be a winner for all growth investors.