Norwich Union has established the Prosper income bond, a guaranteed equity bond that offers investors the choice between income and growth over a five-year term.
The bond is linked to the FTSE 100 index and investors can choose to take income of 5.5 per cent a year, 0.44 per cent a month or 29.6 per cent after five years. Investors get all their original capital back provided the FTSE 100 index does not fall by more than 30 per cent of its initial value, without recovering at the end of the term. If the index falls by this amount without recovering, investors' capital will be reduced by 1 per cent for every 1 per cent fall in the index.
People investing for income are more likely to find this product suitable than growth investors because the maximum growth potential is low considering the capital guarantee is conditional.
Other guaranteed equity bonds that cater for income investors include Morgan Stanley's FTSE optimiser. This is a more complicated product than the Norwich Union bond since it has four options that offer different levels of return and capital protection. Option 2 provides income of 6. 5 per cent a year, 1.55 per cent a month or growth of 36 per cent at the end of the term, which is higher than the Norwich Union product. Morgan Stanley offers slightly more capital protection under option 2 since it allows for falls of up to 40 per cent before capital is put at risk.
However, the Norwich Union product has a five-year term whereas Morgan Stanley's term is five years and three months. People investing for annual income under option 2 of the Morgan Stanley product miss out on three months' income, which would not be the case with Norwich Union.