Is inflation really a factor when deciding what level of income you would like to achieve from your capital? Or perhaps it is the combination of the potential income and the possibility of any capital growth or decline in value that is our benchmark? Either way, how much income an investment might generate, when you might get paid, and the potential risk to your capital, would seem to be the obvious considerations when assessing any sort of income producing investment. And whilst inflation remains at a five year high of 3%, it is likely that if it wasn’t on your radar already, it is now.
Against this challenging economic environment, we take a look at the latest edition of Meteor’s FTSE Monthly Contingent Income Plan, which offers the potential to receive a high level of income that could counter the adverse effects of inflation over the medium term.
The new Meteor FTSE Monthly Contingent Income Plan gives investors the chance to receive a monthly income of up to 0.5%, which equates to 6.0% annual interest. Investors receive the opportunity for income payments each month, and the plan has a fixed term of 10 years. Although the plan is designed to continue for the full 10 years, it also has the ability to mature before the full term (known as ‘kicking out’) at the end of each quarter from the 18th month of the plan onwards.
The plan has the potential to provide 6.0% interest each year, but whether an income payment is made or not is dependent on the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’). In addition to the level of income achieved, the performance of the FTSE also determines the treatment of your initial capital at the end of the investment term.
The FTSE 100 Index tracks the share prices of the 100 largest companies listed on the London Stock Exchange, and is widely recognised as the proxy benchmark for most investment managers, especially those investing predominantly in UK equities.
Potential for high interest
The latest version of the plan offers investors the opportunity to receive a monthly return of 0.5% (6.0% annually), provided the value of the FTSE 100 Index at the end of the month has not fallen by more than 25% below its level at the start of the plan. Therefore, provided the FTSE stays at or above 75% of its starting level for the entire year, then the annual return on the investment would 6.0%, which is double the current rate of inflation.
For those with a more defensive view of what might happen to the FTSE in the coming years, the plans offers a second investment option which pays up to 5.25% each year provided the FTSE does not fall by more than 35% at the end of each month.
Some capital protection from a falling market
In addition to the amount of income paid, the treatment of the investor’s original capital is also dependent on the performance of the FTSE, and so this investment puts your capital at risk. The plan does offer some capital protection from a falling market since your initial investment will only be reduced if, at the end of the plan, the FTSE has dropped by more than 40% below its value at the start of the plan.
Therefore, the FTSE could fall by up to 40% of its starting value and the invested capital will still be returned in full. But if the FTSE falls by more than this, the invested capital is reduced by 1% for each 1% fall. For example, if the FTSE fell by 41% then the investor would lose 41% of their capital. You should therefore only consider this investment if you are prepared to lose some or all of your initial investment.
Kick out (early maturity)
Although the plan has a maximum term of 10 years, after 18 months it has the ability to “kick out” or mature early every quarter. This feature is also dependent on the performance of the FTSE, as the plan will only mature early if the Index has risen by 5% or more above its value at the start of the plan. In the event that the plan does mature early, the initial investment is returned in full along with a final monthly income payment, at which point the plan comes to an end.
The plan offers the potential for an income payment each month, dependent on the closing level of the FTSE on the relevant monthly measurement date. The monthly return of 0.5% will be paid to the investor if the Index is at or above 75% of its level at the start of the plan. Therefore, the FTSE can fall up to 25% and income will still be paid. If the FTSE falls more than 25%, no income is paid for that month, and the next opportunity to receive income would be the next monthly measurement date.
Defined risk and defined returns
One of the reasons investment plans such as these are popular with our investors, is that the potential returns are stated up front, whilst the investor also knows at the outset in what circumstances their capital is at risk. These defined returns for a defined level of risk, allow potential investors to weigh up whether they are prepared to put their capital at risk in return for the potential monthly interest on offer.
As well as non-ISA investments, this income investment is available as a new ISA up to the current limit of £20,000, and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs.
Fair Investment conclusion
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With inflation rapidly becoming a thorn in every investor’s side, not least those seeking an income from their capital, the ability to achieve up to twice the current rate of inflation, even if the FTSE falls up to 25%, is certainly worth a closer look. Combined with some capital protection against a falling stock market, and the defined returns, defined risk on offer could be appealing for a wide range of investors.”
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 is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.
This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. 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.