This unit trust plan aims to provide a steady tax-efficient income that will potentially rise over the long term and that will be unaffected by movements in interest rates. To do this, it converts irregular capital profits from a managed equity portfolio into long-term regular income.
Investors’ capital is divided into two elements – one for income and one for growth. The income pool is set at five times the annual income that is required and investors may take income of 3-7 per cent a year. This is payable on a monthly or quarterly basis and is paid straight into the investor’s bank or building society account.
The income pool originally comprised a cash fund, but now investors can choose a cautious fund of funds managed for Way by multi-manager specialist IMS if they do not want to hold cash in their plan. The annual charge on the cash fund has been halved to 0.5 per cent as part of the revamp because Way believes the charge should only cover admin costs.
The growth pool relies on equities to deliver higher growth and investors have a choice of four risk-graded funds of funds to achieve this. Spikes in performance can be used to top up the income portfolio, so that investors experience a smoothing effect when they receive income.
Every three months, a review is carried out and a portion of any growth achieved within the growth pool will be used to top up the income pool. Topping up the income pool will increase the level of income investors take because although the percentage of withdrawals stays the same, the pot from which it is taken will be bigger.
Another new feature is a software package that enables advisers and clients to simulate historical scenarios and compare returns from the plan with competitor income products.
Setting the income pool at five times the annual growth required gives the plan some leeway in generating the growth required to trigger a top-up. Way says that on rare occasions, such as a lengthy and severe bear market, the income reservoir could run out. If this happens, income will be taken from the growth element and the income reservoir will be topped up again when markets recover.
The investment strategy means that volatility – often something that is viewed in negative terms – can work in investors’ best interests because it prompts rebalances which trigger increases in income. However, investors should be aware that taking a modest income at the start will improve the frequency of income increases, while taking a higher income initially means that income increases will be less frequent.