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Structured products for income

You can get an income well above inflation using structured products - but you should understand their limitations
Structured products for income

Structured products are normally associated with growth strategies. But they can also offer some creative ways to boost your income, provided that you understand the risks and choose your product carefully.

"The problem is that anything giving a higher return than cash comes with more risk to capital and retirees are usually risk-averse, plus the tax implications need to be thought through on an individual level," comments Anna Sofat, director of wealth manager, Addidi.

All stock market-related investments involve a degree of risk as their value can go down as well as up. Structured products change the nature of this risk by offering an element of capital security on your investment. Typically, this will involve a promise that at the end of a specified investment term your capital will be repaid in full whatever has happened in the market.

But not all structured products promise to repay capital, and these are usually the ones with the most enticing income credentials. High regular income structured products offer a level of regular income over a fixed period, usually well above the returns currently offered by the best savings accounts on the market. While the income level may be higher than the amount you are earning in a risk-free deposit, repayment of your capital is not guaranteed, and will rely on financial markets not going into very sharp reversals, for example, the FTSE 100 index not falling by more than a set amount. If it does then your capital will be reduced at the end of the term.

Other risks

Opponents of structured products say they are complicated, inflexible and generally produce disappointing returns. Then there's the counterparty risk: the possibility that the company backing the product fails.

Early surrender of these investment will normally incur a penalty, or may simply not be permitted, while upside can be limited as returns are typically capped at a certain level even if the stock market rises higher than this. Manager charges and commissions to advisers are typically built in to the plan structure, which critics say make them opaque, and holders of structured products also do not benefit from dividends.

Despite these drawbacks, there is still a case to be made. "Considering structured products as an additional segment of an existing balanced portfolio, can serve to not only provide a degree of defined outcomes at pre-defined dates which could help tax planning, but also potentially enhance the returns whilst reducing the risk of loss," comments Ian Lowes of Lowes Wealth Management.

Products which Mr Lowes currently favours include the Jubilee Inflation Linked Income Plan.

This six-year plan is linked to the UK Retail Prices Index (RPI) and the FTSE 100 Index and is designed to pay an income equivalent to the annual rise in the RPI plus 2 per cent per year gross, on a monthly basis throughout the investment term. Should the RPI fall below zero, a minimum income equivalent to 2 per cent a year gross will be paid. The plan aims to return investors' original capital in full at maturity, unless the FTSE 100 Index closes at a level 50 per cent or more below the initial index level (taken on 11 March 2011) on any day during the investment term and fails to recover to at least the initial level by 13 March 2017. It's backed by Swiss bank UBS (rated A+ by Standard & Poor's), charges of 5.6 per cent are built in, and early surrender will cost you £150 plus VAT.

Mr Lowes also likes the Morgan Stanley FTSE Income Plan 4, a six-year, FTSE 100-linked plan designed to provide investors with annual income at the rate of 6.6 per cent gross, which is payable throughout the investment term regardless of the movement in the index.

The plan aims to return investors' original capital in full at maturity, unless the index closes at a level 50 per cent or more below the initial index level on any day during the investment term and fails to recover to at least the starting level by 24 February 2017.

A number of other structured income products can be viewed on www.comparestructuredproducts.com (which is operated by Lowes Wealth Management). Once you have logged in, adjust the filter from 'preferred' to 'all' and select 'Income' in the next filter to view these. However, Mr Lowes says he is not keen on many of the other income products currently on the market: "Some have income [as opposed to return of capital] which is conditional upon the index not falling below a certain level - these could easily produce greater total returns over the investment period but the way we see it is that if the investor is looking for an income solution, you can't utilise one where the income could stop."

Ms Sofat suggests the Aria Enhanced Income fund paying 8.25 per cent until 2015 with some capital protection, and Investec's FTSE 100 Bonus Income Plan 13 which pays an annual income of 6.75 per cent plus a potential 0.5 per cent bonus, with the return taxed as capital gain rather than income.