In the last six months interest rates have reduced dramatically from a Base Rate of 4.5% to one of 0.50%. As has been highlighted by all commentators the current rate is unprecedented.

While borrowers may have been rejoicing, albeit not all of them as the Banks have widened their margins, those people who have built up savings have seen their income reduced to almost zero; indeed tax on interest is for all intents and purposes irrelevant!

In addition to this, with inflation currently around 3% this means that their capital and, therefore, spending power is being eroded too.

So, are there any ways of maintaining income at a level that seems ‘worthwhile’ or is all lost?

The good news is that the answer is ‘There are attractive solutions’. Over the years there has been a steady increase in the demand for structured products. Their equivalent has been used by investment institutions for years and gradually the retail markets are increasing their exposure to them as part of their investment portfolio.

Given the current investment climate structured products have an even greater role to play in shaping the investment portfolio, so long as they are only part of a portfolio and not a core element. In fact, some investment advisers would even say that structured products are becoming a ‘quasi asset class’, within a portfolio, and one very well suited to the pensions/ SIPPS market.

However, back to the income issue! There are a number of structured product providers offering annual income of 7% to 8% or a slightly reduced equivalent monthly income. This can be tax free through an ISA where the maximum investment is £7,200 per person.
In most cases the money needs to be invested for five to six years and will most likely be based upon the FTSE100. After that time the capital will be returned in full so long as the final level of the Index is not below 50% of
the opening level.

There is also an income product with the same levels of protection which offers 6.5% per annum over five years but which in the event of the FTSE100 having risen by 20% or more after year three will mature early but paying 13% on top of the scheduled interest payments ie 32.5% over a three year period.

Now, most pensioners are looking for income and so ‘tying up’ the money should not be such an issue, albeit this might depend upon their age; ie: at some stage access to capital may be deemed to be preferable, depending upon their financial circumstances.

However, there are other products that can potentially only last for one year and offer a return in the region of 14% per annum. These products are also usually based upon the FTSE100 and called kickout investments. Quite simply the Index has to be at the same level or above the opening level one year after the original investment. If it isn’t it rolls over into year two and the return would be 28% if the same criteria is met. If it goes to year three the return would be 42%. Once again these plans can be put in an ISA and if it runs the full term – five to six years – unless the Index falls by more than 50% the original investment would be returned in full. Based upon the current level of the FTSE100, about 3,800 (at the time of writing) compared with an all time high of 6,930 in December 2000 and with the Banking crisis beginning to be resolved the potential for an early maturity seems quite likely – albeit in the current market there are no guarantees.

In summary, for a person to maintain their level of ‘income’ or at least go some way to achieving an ‘acceptable’ level of income a greater focus on financial planning maybe needed than in the past, making the advice of an Independent Financial Adviser even more valuable. The good news is that there are solutions, and these are just some of those available for savers/investors to maintain their ‘income’ stream.It’s not a lost cause, by any means.

Chris Powell
Managing Director of Arc Capital & Income