Income investments are consistently our most commonly requested investment plans, with many also choosing to use their ISA allowance in order to receive the income tax free. It is therefore perhaps not surprising that we have seen an increase in the number of fixed term income investment plans available in the market. To this end, we compare three investment plans which between them offer up to 7% income, along with some capital protection against a falling stock market.
Income, income, everywhere
The need for income is one of the most common demands put on our capital, and with continued pressure from record low savings rates and uncertainty around future dividend yields, the defined return and defined risk from structured investment plans have meant these have become increasingly more popular with income seekers.
Features in common
The income plans under the spotlight here are the FTSE Dual Option Contingent Income Plan from Meteor, the FTSE Quarterly Contingent Income Plan from Focus and the FTSE Range Income Plan from Mariana. All three plans have a number of features in common, including:
Based on the performance of the FTSE 100 Index
Both the level of income and the return of your initial capital for all of these plans is dependent on the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’). The FTSE is widely recognised as the proxy benchmark for most investment managers, especially those investing predominantly in UK equities. Since the historical volatility is familiar to many investors, they are in a better position to consider the pros and cons of the plan within the context of the underlying investment and the potential income on offer.
Fixed term
All of the plans have a fixed term, and although you do have the option to withdraw your money early, the plans are designed to be held for the full term and early withdrawal could result in you getting back less than you invested. The fixed term may well appeal to those who need to know exactly how long their capital will be tied up for and can benefit from planning around this.
The Focus and Meteor plans also include the ability to mature early or ‘kick out’, which will occur if the Index has gone up by 5% or more at the end of each quarter, from year 2 onwards. If it does, a final income payment will be made along with a full return of your original capital, which may appeal to those who would like to re-consider their investment options should the FTSE rise.
Quarterly income
All three plans offer a quarterly payment frequency, and so investors have a regular opportunity to receive an income payment. Quarterly payments are a popular feature and could be attractive if you are looking for the opportunity to supplement existing income.
Up to 7.0% annual income
These plans are designed for investors looking for a high level of income, with a maximum potential income of between 5.4% and 7.0%. The main difference between the three plans is the level the FTSE has to be in order for the income to be paid each quarter. So depending on what you think might happen to the FTSE in the coming years, these plans cater for a wide range of investor views by covering a number of eventualities.
7.0% income if the FTSE does not fall more than 20%
Option 2 of the Meteor Dual Option Contingent Income Plan offers a quarterly payment of 1.75% provided the FTSE at the end of each quarter has not fallen by more than 20% from its value at the start of the plan.
6.50 % income if the FTSE does not fall more than 25%
The FTSE Quarterly Contingent Income Plan from Focus offers up to 6.50% each year, with a 1.625% income payment made at the end of each quarter provided the FTSE 100 Index closes at or above 75% of its value at the start of the plan – so it can fall up to 25% and you would still receive an income payment.
5.40% income if the FTSE does not fall more than 40%
Option 1 of Meteor’s Dual Option Contingent Income Plan offers a quarterly payment of 1.35% provided the FTSE at the end of each quarter has not fallen by more than 40% from its value at the start of the plan.
7.0% income provided the FTSE stays within an increasing range
The FTSE Range Income Plan pays 1.75% at the end of each quarter, provided the FTSE 100 Index closes between an upper and lower range based on its level at the start of the plan. This range starts at +/- 12% at the end of quarter one, and then increases by +/-0.75% each quarter finishing at a range of +/- 29.25% in the final quarter.
With all plans, if the FTSE falls outside of the level required at the end of each quarter, no income will be paid for that quarter.
Conditional capital protection
Another feature of these plans, which sets them apart from other capital at risk income investments, is the conditional capital protection. This means that your initial capital is returned in full at the end of the term provided the FTSE 100 Index has not fallen by 40% or more below its value at the start of the plan. This is measured at the end of the investment only and offers investors some capital protection against a falling stock market.
If the FTSE has fallen below this level, your original capital will be reduced by the same percentage as the fall in the Index. In this situation at least 40% of your initial investment would be lost, so you should understand that your capital is at risk and that you could lose some or all of your investment.
Risk versus reward
With savings rates continuing at record lows, the principle of risk versus reward means that the search for potentially higher income returns leads us to consider putting our capital at risk. A good benchmark for assessing an investment therefore is to compare what you could get from a fixed rate deposit over a similar timeframe, and then consider whether you are comfortable with the additional risk to your income and capital.
Anything around 2.75% is currently a top savings rate in the longer term fixed rate bond market and so by accepting risk to your capital, you have the opportunity to increase your income by up to 4.25% a year, depending on which income plan you invest in. The decision is therefore whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in return for a potentially higher level of income.
Credit ratings and agencies
With structured investment plans your capital is used to purchase securities, normally issued by a bank (the counterparty), which are designed to produce the stated returns. This means their ability to be able to meet their financial obligations become an important consideration. This is known as credit risk and means that in the event of the counterparty going into liquidation, you could lose future income returns and some or all of your initial investment. These plans are also not covered by the Financial Services Compensation Scheme for default alone.
One accepted method of determining credit worthiness of a company is to look at credit ratings, issued and periodcially reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit agency and has attributed the following ratings to the counterparties used in the above plans (as at the start of their offer periods):
| Plan | Counterparty | S&P rating |
| Focus | Credit Suisse | ‘A’ rating with a stable outlook |
| Mariana | Natixis | ‘A’ rating with a stable outlook |
| Meteor | Natixis | ‘A’ rating with a stable outlook |
The ‘A’ rating denotes a strong capacity to meet its financial commitments and repay debts, whilst the ‘stable outlook’ indicates that the rating is not likely to change in the short to medium term (between 6 months and 2 years).
Fair Investment conclusion
Commenting on the current range of FTSE based income plans, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “By combining the potential for a high level of income with some capital protection should the stock market fall, these plans could offer a compelling balance of risk versus reward when compared to other income alternatives available in the market.”
He continued: “With the opportunity for up to 7.0%, the headline yields are attractive for plans based on the performance of the FTSE whilst the cap on any income is balanced with the conditional capital protection included. Depending on what you think might happen to the FTSE in the coming years, there should be something here for every investor.”
Click here for more information on Meteor’s FTSE Dual Option Contingent Income Plan »
Click here for more information on the Focus FTSE Quarterly Contingent Income Plan »
Click here for more information on Mariana’s FTSE Range Income Plan »
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.
These are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Income payments are not guaranteed and there is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.