The income and capital lock-in plan issue two provides income of 6.25 per cent a year, which is paid 1.5625 per cent quarterly, provided the index does not fall by 40 per cent or more during the five days before income payments are made. However, income can be locked in for the remainder of the term, regardless of subsequent index performance, if the index is above 125 per cent of its initial value at the end of any year during the term.
Investors will also receive a full capital return provided the index is bove 125 per cent of its initial value at the end of any year during the term, regardless of subsequent index performance. If this lock-in feature is not triggered, the capital will still be returned in full at the end of the term provided the index does not fall by 40 per cent or more by the final day of the term. This is known as hard protection and if breached, investors will lose 1 per cent of their original capital for each 1 per cent fall in the index.
According to the Structured Product Review IFA website as at September 27, 2010, six-year income plans are available from Morgan Stanley and Barclays Wealth. Both plans link the capital, not income, to index performance. No details were available at this date for Investec’s latest income products following the tranches that closed on October 1.
Morgan Stanley’s FTSE income plan 3 pays an annual gross income of 6.75 per cent for six years, with capital at risk only if the index falls by more than 50 per cent during the term and does not recover to its initial value. Barclays Wealth offers similar capital protection to the Morgan Stanley plan, but lower annual income of 5.75 per cent. Unlike the other plans, it has a monthly income option paying 0.4667 per cent a month.
Choosing between the plans depends on whether advisers and their clients feel that linking both income and capital to index performance is a worthwhile trade off for the lock-in facility and 40 per cent protection.
Some may prefer the other products because only the capital to the performance of the stockmarket. Morgan Stanley’s higher headline rate will appeal to some, but others may opt for Barclay’s monthly income option.