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Product matters

Scottish Life International&#39s select income and growth bond gives two options, one for the more aggressive investor and one for the more cautious. Both are linked to the FTSE 100, S&P 500 and Eurostoxx 50 indices.

The aggressive option guarantees a 10 per cent gross annual income, 2.4 per cent quarterly income or 32 per cent growth over the term. It provides 30 per cent “soft” protection on the worst-performing index, a feature we do not like. For example, should the Eurostoxx 50 fall by 30 per cent at any time, all three indices must recover to at least their original levels for the capital to be returned in full. If the indices do not recover, downside gearing is applied to the performance of the lowest index at a rate depending on whether you choose the growth or income option.

For example, investors taking the growth option can expect gearing to reduce the return by as much as 2.066 per cent for every 1 per cent fall in the market.

The cautious option guarantees 8 per cent gross annually, 1.9 per cent quarterly or 25.5 per cent growth. Again, there is “soft” protection of 30 per cent on the worst performing index but, if an index does break the barrier, then all the indices have to return to only 85 per cent of the initial value. Presuming the safety barrier is broken, the downside gearing has an effect on the initial investment if the final level is 15 per cent below the initial level. Again, the degree of gearing depends on whether the income or growth option is taken.

My personal opinion is that there are better products on the market that offer equivalent returns with greater safety.

Darius McDermott is managing director of Chelsea Financial

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