Would you back the FTSE 100 for returns of up to 7%?

A new structured product from Morgan Stanley promises annual returns of up to 7% if the FTSE 100 stays above a certain level.

Getting a decent return on your money is becoming harder and harder, particularly if you stick to mainstream savings accounts. The average return on a five-year fixed rate savings bond is 2.28%, according to financial data provider Moneyfacts.

So many people are now turning to the stock market in the hunt for greater income.

A new structured investment product from Morgan Stanley, the FTSE Income Accumulator Plan, is promising annual returns of up to 7% over a six-year period, depending on the performance of the FTSE 100.

How the Income Accumulator Plan works

A structured investment product is one where your investment return is determined by the performance of an asset, but you’re not investing directly in the asset yourself. However, your initial investment is at risk if the asset doesn't perform above certain levels.

In the case of the FTSE Income Accumulator Plan, for each week the FTSE 100 is between 4,500 and 9,000 points you will earn income, which will be paid quarterly up to a maximum of 1.75%. The level of income will depend on how many weeks during the quarter the index is between those two benchmarks.

For example, if it stays there for the whole 13-week period, you’ll be paid the maximum quarterly income of 1.75%. If it finishes there on 11 of the 13 weeks, you’ll receive 1.48% (1.75% / 13 x 11). So you have the possibility of earning up to 7% in a year.

And as long as the FTSE does not fall below 4,000 on the day your six-year term ends, you’ll get your original investment back.

However, if it has fallen your original investment will be reduced by the same percentage the FTSE has fallen over the six years. So if the FTSE was at 6,500 points on the day your plan began (the start value), but on the day it ends it’s at 3,900 (the end value) you’ll receive a return of 60% of your original investment as the end value is 40% lower than the start value.

However, if it falls to 4,001 points you’ll receive your original investment back in full, although you won’t have received any income for the weeks when it was below 4,500.

Not getting your original investment back in full isn’t the only risk either.

The plan is not covered by the Financial Services Compensation Scheme, should Morgan Stanley fail.

There’s a minimum investment of £3,000 into the plan.

At the time of writing, the FTSE 100 stood at 6,413. It hasn't dipped below 4,500 since July 2009, though it's always important to remember that past performance is no indicator of what to expect in future.

Pros

• A chance to earn a potentially far higher annual income than from a conventional savings account.
• You only miss out on income for those weeks when the FTSE 100 falls below the 4,500-point threshold.
• There is some risk mitigation in that the FTSE has to fall a fairly long way in six years for you to lose money. But it could happen.
• Can go in an ISA or SIPP.

Cons

• Your money is locked away for six years.
• Over the long term, the stock market has produced greater returns than 7%.
• The plan isn’t protected by the Financial Services Compensation Scheme so your money won’t be returned if Morgan Stanley fails.
• The FTSE 100 could be below 4,000 points in six years, meaning you'll lose some of your original investment.
• The FTSE 100 could rise above 9,000 points, meaning you don't earn any income.

Find out more about investing in the FTSE Income Accumulator Plan with Fair Investment

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