Of all the investment themes, income is consistently at the forefront of the investor’s mind, whether you are working and need to supplement your earnings, or retired and looking to add to your pension income.

The need for income never goes away and with the current economic environment providing one of the most challenging ever seen, we take a look at one particular solution that is proving popular with income seekers.

Economic woes

The economic landscape is one that continues to offer little in the way of a positive step towards continued growth and those looking for income are affected as much as anyone. Interest rates continue at 0.5% for well into their third year, many salaries have been frozen due to the pressures on business, annuity rates are at record lows, creating uncertainty at retirement, and all of this with inflation continuing well above target.

More worrying still is that as each day passes, it is becoming ever more apparent that no workable solution is likely to present itself any time soon and that any forecasts should be taken as just that. Therefore, amongst it all, it is at least reassuring that there is an investment plan which on balance makes for a compelling option.

Income Builder Plus

The Income Builder Plus from Gilliat is a 5 year investment that accrues income for each week the FTSE 100 Index remains above 3,500 points. The income is paid quarterly and capital is repaid at maturity provided the FTSE does not fall below this same level; this is known as conditional capital protection.

The principle of risk v reward dictates that higher returns should only be achievable by taking increased risk. With this in mind, we take a look at the various components which make up this plan.

Potential for up to 8.4% annual income

The reason for its popularity is the headline grabbing potential yield of 8.4%. For each week the FTSE is at or above 3,500 points, income will be accrued with a payment made each quarter. Should the FTSE remain at or above this level for each week during the quarter, the maximum income payment of 2.1% will be made.

This equates to a potential annual income of 8.4% and also means that if the FTSE dropped below this barrier you would only miss out on income during those weeks, rather than the whole quarter.

Conditional capital protection

Another feature of this plan which is attractive when making comparisons to other capital at risk income investments is the conditional capital protection. This means that provided the FTSE does not fall below the same barrier of 3,500 points, you will receive a full return of your original investment.

This works separately to the income and unlike a number of other investment plans in the market, has the benefit of only being measured on the final day of the investment, rather than on each day throughout the investment term.

In the event that the FTSE does finish below this level on the final day, then your capital will be reduced by the same percentage that the FTSE is below the starting value. For example, if the starting value was 5,465 (today’s opening value) and finished at 3,279, you would only receive a return of 60% of your initial investment as the final value is 40% below the starting value (and below 3,500 points).

Morgan Stanley

Morgan Stanley acts as counterparty for the plan, which means that repayment of your capital and any return is also dependent upon the ability of Morgan Stanley to repay its liabilities, This is known as credit risk and means that, in the event of Morgan Stanley going into liquidation you may lose some or all of your initial investment and any returns.

One accepted method of determining credit worthiness of a company is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit agency and at the time of publication Morgan Stanley has been attributed an ‘A-‘ rating with a negative outlook. The ‘A’ rating denotes a strong capacity to repay debts, and the ‘-‘ signifies it is at the lower end of this rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term, circa 6 months to 2 years.

Fair Investment conclusion

The market for income investments is full of attractive yields but it is important to fully understand how each works and the risks that are associated with it. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remembered that it is the income and capital loss/rise combined that effect your overall return.

Head of savings and investments at Fair Investment Company Oliver Roylance-Smith said:

“Compared to other income alternatives available in the market, the Gilliat Income Builder Plus offers a compelling option. The headline yield is highly attractive and the cap on any income is in line with the conditional capital protection. This combines to give an attractive balance of risk v reward”.

The plan is open for direct investments, ISAs and ISA transfers.

Click for more information about the Gilliat Income Builder Plus »

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.

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.

© Fair Investment Company Ltd