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[IvanOpinion]

does anybody have any thoughts on this? It is a 6 year investment that offers 10 times index growth (max 80%) but your capital is not guaranteed (if the index falls by more than 50%)

ivan

[Mr Mumble]

Normal looking Structured Capital At Risk Product (SCARP). The following is back of the envelope stuff, please correct any mistakes!

80% over six years is an AER of 10.3% capped.

Chance of losing money, in nominal terms is very, very low.

Post 1914 a 50% drop would have happened around 1929, 1974 and 2000-2002, so this would suggest a roughly 33/1 chance. However, there was a quick and sharp rebound in '75 and we are nowhere near the bubble territory of 1929 or 1999. Also, a halving of the FTSE-100's value in 2014 would put it around 1995 levels, a 20 year nominal capital value freeze has never happened, not even in the US if you'd bought on October 23rd 1929! So, its more likely 100/1 than 33/1, if I were a bookie I'd say fair odds are 66/1. Of course the old warning must be given here: past performance is not necessarily indicative of future returns.

A nominal return of capital would still be a fall in real-terms. Factoring in 4% RPI would mean a loss of 26.5% if the FTSE-100 fell <50% over 6 years or stayed the same.

The loss of dividend income needs to be factored in. A cheap FTSE tracker or equity income investment trust is going to pay out a dividend of 3.5% at the moment, so 23% (excluding dividend growth) over the 6 years. Therefore:

The FTSE-100 needs to see a capital gain of between 2.3% and 57%
or
a loss of >23.1% and <50.1%
for this SCARP to do better than a tracker over the six years.

The tax situation of the SCARP should be beneficial for most people, i.e. those who don't have a Capital Gains Tax liability and can use up their allowance. Important to realise that the capital gains will be realised in the year of maturity so putting >£11,500 in would mean going over the current personal CGT allowance of £9,200 if the value of the FTSE-100 rose 8%+ in the six years. Of course the government could tinker with the tax rules and make the above meaningless.

Frankly, it looks a decent product to me. I think its worth a good look if you:
1. Are using your 7K ISA allowance.
2. Are paying a fair amount into a pension.
3. Want a relatively high return with some capital protection.
4. Don't have the expertise to make use of the CGT allowance.
5. Aren't prepared to pay an IFA for that expertise.
6. Are currently paying income tax on a large chunk (say 10K+) of change in a deposit account that you know you will not need in the next 6 years.

Note: I'm ignoring the 4%pa 'bonus' since you only gain interest for a few weeks before the money is invested, they don't pay out until a week after the maturity period either. I'm also ignoring the stated 3% commission since this seems to be built into the calculations Keydata give.

[Bazn]

looks like an attractive product to me... an mr mumble sai in his very informative post, 50% drops without recovery are very rare.

IMHO the risk-reward profile of products like this are much better than the 100% guaranteed products (which usually offer only a fraction of the growth potential)