Structured product provider Nvesta has established the Safety Net Income Plan, a capital-protected bond that provides income over a five-year term.
The plan provides income of 5 per cent a year net of basic rate tax, which is the equivalent of 6.25 per cent gross for basic rate tax payers and 8.15 per cent gross for higher rate tax payers.
In addition, investors will get a full capital return plus 1.25 per cent provided the FTSE 100 index does not fall by more than 50 per cent during the term. Even if it does, investors will get their capital in full if the final index level is above the initial level. If it is below the initial level, investors will lose 1 per cent of capital for every 1 per cent fall in the index.
Nvesta says this product is different to other income-producing investments because the annual income tax liability is deferred until the plan matures in 2009. At maturity, investors can use their annual Capital Gains Tax Allowance which should mean most investors have little or no tax liability.
To do this, the product must offer an element of growth, which is why investors get a 1.25 per cent return above their original capital as well as income at maturity. The structure of the product means that the annual income is provided by 21.5 going into a deposit, while the remaining 78.5 per cent of the capital is invested in a zero coupon bond. This element will grow to 101.25 per cent, enabling investors to offset the gain against their CGT allowance.
This plan is unique at the moment as there are no other structured products designed purely for income, although Keydata is planning something similar without the ability to offset proceeds against CGT allowance so income tax liabilities may apply. However, people who take out income-producing structured products stand to lose their capital if the index does not perform well, so they would not be suitable for all income seekers.