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Product matters

For clients wanting to take some risk, the NDF protected income plan 1 offers a very attractive rate of income for the level of risk to capital.

As this plan was priced before the recent interest-rate cut, the annual income level of 7 per cent for five years (or 0.54 per cent monthly income) seems even more attractive.

The plan will repay the original capital provided that the FTSE 100 does not halve in value and fail to recover to the starting level by the end of the five-year term. At current levels the FTSE 100 would have to fall below 1,800 for any capital loss.

The one drawback is that if the 50 per cent barrier is broken, there is downside gearing of 2 per cent for every 1 per cent fall in the index. For example, if the plan falls by 55 per cent and recovers to 30 per cent below starting value, 60 per cent of the capital would be lost.

However, clients would have had 35 per cent income over the five years, so, in total, your investment would have fallen by only 25 per cent. So long as the client is aware of the risks they are taking for an income level of almost twice the base rate, this investment can form part of a diversified portfolio.

There are many tax advantages within this plan. Rather than paying tax of 20 per cent or 40 per cent, the income is taxed as a dividend. Basic-rate taxpayers will pay only 10 per cent and higher-rate tax-payers 32.5 per cent. There is also the opportunity to use this and next year&#39s Isa allowances and a couple could invest up to £28,000 with no income tax to pay.This would yield a tax-free income of £9,800 over five years.

Darius McDermott

is managing director of Chelsea Financial Services

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