GE Life has established the income option plan 4, a guarantee equity bond that provides a choice of two annual income options, two monthly income options and two growth options.
The plan is linked to the Dow Jones Eurostoxx index and is split into two main options, option 1 and option 2. Option 1 provides annual income of 9 per cent, monthly income of 0.71 per cent or growth of 30 per cent at the end of the three-year term. Option 2 provides annual income of 7 per cent, monthly income of 0.55 per cent or growth of 24 per cent at the end of the term.
The higher returns available under option 1 offer a lower degree of capital protection than the returns available on option 2. Investors in option 1 get all their original capital back provided the index never falls by more than 33.33 per cent during years two and three without recovering to its starting level. If this does not happen, capital is reduced by 2 per cent for every 1 per cent fall in the index.
Investors in option 2 get all their original capital returned unless the index falls by more than 51 per cent in years two and three without recovering to its start level. If it falls beyond 50 per cent without recovering, investors will lose 2 per cent of capital for every 1 per cent fall in the index.
The bond is likely to be of interest only to sophisticated investors who understand that they could lose capital at a higher rate than any fall in the index. The product is designed to give investors a wide choice of income and growth options, but the end result could confuse them.