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What makes an income plan attractive?

Blair Carmichael - 29/05/2019

Whilst structured products offering capital growth constitute the majority of the market, there is also a sub-sector which offers income. In the past few years, these income products have often contained a ‘kick-out’ element, and have typically been ‘contingent’, granting the investor a regular income payment, dependent upon the price level of the underlying index on the given date.

For example; The Meteor FTSE Monthly Contingent Income Plan June 2019. Linked to the performance of the FTSE 100 Index, pays the investor a 0.417% gross monthly income if the FTSE 100 Index closes above 65% of the Initial Index Level on each respective monthly observation date. However, an additional condition is added from the second year, whereby if the index closes more than 5% higher than the Initial Index Level, the investor will have their initially invested capital returned in full, in addition to a final income payment. These terms are all subject to the continued solvency of Morgan Stanley & Co. International PLC, rated A+ by Standard & Poor’s.

Investors that seek an income are usually doing so to maintain their lifestyle and therefore may require a certainty of income. If a plan such as the above matures early, income stops, and the proceeds will need to be re-invested on potentially differing terms. A somewhat less palatable scenario is where the income ceases because the underlying index has fallen below the income threshold. In such circumstances, it would obviously be a bad time to have to withdraw capital from other investments to supplement the income shortfall.

Whilst income plans have proven popular amongst many advisers, we at Lowes have, with few exceptions; only ever recommended capital at risk income plans with no kick-out feature whereby the income will continue to be paid in all circumstances, other than counterparty default. Unfortunately, the pricing environment for structured income plans over recent years has been such that trades of this nature are very rare, to the extent that if you want a meaningful income, an additional condition will need to be incorporated into the plan. Whether that be the inclusion of an early termination / kick-out clause; the income being contingent, or both. Ultimately, this decision is made by the plan manager but in short, as ever, there’s no such thing as a free lunch!

Investments of this nature carry risk to your capital.