Investor demand for new products has lead to an explosion in developments by the major financial institutions. Secure investments are de rigeur at the moment and Bank of Ireland Asset Management (BIAM) has introduced a new product to the market.
BIAM's Secured Profits Bond is a seven-year life assurance-based investment that awards bonuses linked to stock market investment performance each year. The original sum invested is secure if held for the seven-year term, regardless of stock market performance.
Pre-tax annual bonuses are awarded based on half the growth in a basket of equally weighted indicies - S&P 500 (US), Eurostoxx 50 (Europe) and Nikkei 225 (Japan). This is subject to a maximum of 20 per cent growth in the relevant indicies. In year one a 5.25 per cent pretax bonus, unlinked to stock market performance, is awarded. In years two to seven an annual bonus from zero to 10 per cent per annum pre-tax may be awarded based on the indices' performance.
Once a bonus has been secured, it is locked in for the rest of the seven-year term. Effectively, customers are rewarded with bonuses if they totally commit the funds over a seven-year period. If policies are encashed before maturity no bonuses are payable. Total encashment is available after year one. No partial encashment can be made during the term of the policy.
In the event of a market downturn, the product has an "annual reset mechanism" designed to potentially deliver a bonus based on any subsequent recovery in the markets. The minimum investment is £5,000 (€6,348) and the cumulative maximum that any individual may hold in the product is £250,000.
Returns are subject to policyholder tax at maturity at the prevailing rate (currently 24 per cent). Under the Budget proposals, the returns on this bond would be taxed at the standard rate of income tax (22 per cent) plus 3 per cent.
BIAM says there are no upfront charges but "a charge equivalent to 1 per cent per annum of the original capital is built into the product terms and conditions". BIAM is opening the second tranche of the Secured Profits Bond on February 9th.
