I’ve not generally been a fan of capital protected plans of late due to the balance between risk and return appearing rather unattractive. But is this new plan from Barclays any different?
The Barclays Defined Return Plan (Annual Kick-Out 100 option) is designed to mature on any anniversary provided the FTSE 100 is no lower than its starting level, at which point you’ll receive your initial investment plus a return equal to 9.1% for every year your money has been invested.
So, for example, if the FTSE 100 is 5,300 on the start date of 14 October 2010 and at least 5,300 on 14 October 2011 then the plan will close and you’ll get back your initial investment plus £91 per £1,000 invested. If it’s lower than 5,300 on the first anniversary then the plan rolls on for another year and so forth until either the index is 5,300 or more on an anniversary (with a return of £91 x the years you’ve had the plan) or the sixth anniversary comes up.
If the plan hits the sixth anniversary and the FTSE 100 is lower than the start level you’ll just get back your initial investment in full unless the index is less than 50% of its starting level – i.e. below 2650 in our example – in which case you’ll receive your initial investment less the percentage fall in the index. So if the index falls by 60% a £10,000 initial investment will be worth only £4,000.
If you make any gains they’re subject to capital gains tax, or tax-free if held in the stocks & shares ISA option.
When investing in protected plans it’s vital to check who the counterparty is, i.e. the bank providing the financial wizardry behind the scenes that makes the plan work, as if the counterparty goes bust you could end up waving goodbye to some or all of your money – especially as such failures are not usually covered by the Financial Services Compensation Scheme. In this case the counterparty is Barclays themselves, which gives reasonable cause for comfort as they’re one of the higher rated backers of this type of product – but there’s no cast iron guarantee.
Given the potential risks this should not be viewed as an alternative to a savings account.
Is the plan likely to make you money?
This depends on your views of where the FTSE 100 is headed. I think it’s fairly likely it’ll be higher than the start level on one of the anniversary dates over the next six years, but these are highly uncertain times so I’m not sure I’d want to bet on it. Plus, in a worst case scenario, if Barclays defaults on its promises you could be left high and dry with no prospect of compensation – although the likelihood of this is slim.
On the plus side any gains (outside of an ISA) can be offset against your annual capital gains tax allowance - potentially appealing to higher and top rate taxpayers.
Overall I think the plan is worth considering if you’re mildly positive about the outlook for the FTSE 100. However, optimists would probably do better focussing on conventional stockmarket investments (where they could also benefit from dividends) while pessimists should probably give this plan a miss.
If you decide to invest you might be able to get back some of the initial 3% commission via a discount broker.
The closing date for applications is 30 September 2010.