If you are interested in obtaining index-linked returns on your savings and investments you are probably already aware that such products were withdrawn from the market last week by National Savings and Investments (NS&I). Their withdrawal was made necessary because the rules state that NS&I is not allowed to dominate the market and sales had “far exceeded” the level anticipated.

There were probably two main reasons why the NS&I product was so attractive to savers:

(1) The first reason is the continuing low level of interest rates on deposit accounts, which seem unlikely to increase in the next year or two. The Bank of England Base Rate has been just 0.5% since March 2009. Although the Office for Budget Responsibility (OBR) has said that it expects rates to start to rise next year, economist Professor Peter Spencer of the Ernst & Young Item Club said recently that the Bank of England will have to keep interest rates at their current level until 2014 to counter-balance the government’s spending cuts.

(2) The second reason is the realisation that inflation is currently making a serious inroad into their capital. UK inflation slowed for a second month in June, to 3.2% from 3.4% in May but it is well above the Bank of England’s 2.0% target. The Retail Prices Index (RPI) which includes housing costs is still 5% after falling from 5.1% in May. Whilst a number of economists argue that deflation is more likely than continuing high levels of inflation, the problem is that the inflationary pressure of the previous Government’s massive quantitative easing measures is difficult to predict.

So where can investors turn now?

Well I could simply point to the fact that, over time, a well diversified portfolio of equities has proved to be one of the few consistent hedges against inflation. However, I am conscious that the majority of people who would have previously used the NS&I index linked products would be anything but equity investors.

Instead, therefore, I would like to mention an alternative investment that is likely to appeal to some investors who might otherwise have sought out an NS&I product. As you would expect from an investment adviser, this investment includes risks to your capital but those risks can be known in advance and a proper decision made about them.

I am referring to the Real Growth Plan (Issue Two) which is offered and managed by Jubilee Financial Products LLP, an independent asset management company authorised and regulated in the UK by the Financial Services Authority.

What does the Jubilee plan provide ?

This is a six year investment plan (the NS&I plans had 3 and 5 year terms) which offers investors a return linked to inflation as measured by the Retail Prices Index (RPI).  Now I mentioned deflation earlier so any purely inflation linked investment, such as that previously offered by NS&I, could provide a poor return. The Jubilee product is interesting because it offers a return linked to inflation as measured by the Retail Prices Index (RPI) or the growth of the FTSE 100 Index (the main UK equity index), whichever is greater. This is what is called a structured product, and these have been defined as ‘investment products that deliver a known return for given investment circumstances.’

So far, so good. So what is the downside? I did mention that there would be risks to your capital. There are two main risks as follows:

(a) Retail structured products usually provide a measure of capital protection and this is what makes them so attractive to investors. The protection in this case is what is referred to a ‘soft’ protection, that is it can be breached and is not a guarantee. Specifically you may get back less than you have invested if the FTSE 100 closes at or below 50% of its initial index level on any trading day during the investment term and both the FTSE 100 and the RPI are below their initial index level on the maturity date. So if the FTSE 100 never falls below 50% of its initial index level your capital is protected. Furthermore, even if the FTSE 100 does fall below 50% of its initial index level your capital is still protected if in six years’ time if either the FTSE 100 or the RPI index is no lower than its initial level. In a worse case scenario and both tests fail then your capital will be reduced by the percentage reduction in the FTSE 100 index. However even in that situation you may still receive a growth payment to partly offset this loss if the RPI is above its starting level. I appreciate that this can sound complicated but the literature is well written and we are here to answer your questions.

(b) The second risk is the possible failure of what is called the ‘counterparty’, that is the bank holding your money during the investment period. In this case the bank is UBS AG (London Branch), part of UBS, the second largest Swiss bank, which is rated A+ by Standard & Poor’s, Aa3 by Moody’s and A+ by Fitch. You should be aware, however, that should the bank fail then you would not have recourse to the bank guarantee scheme as you would with a normal deposit account.

General guidelines about structured products

Using structured products in an investment portfolio can reduce the risk of that portfolio because with structured products you know that they will do certain things at certain times. If you have never used a structured product before you should read our background notes on this type of product www.arch-fp.co.uk/structured_products.php. Our general guidelines are that you should not invest more than 25% of your investment portfolio into structured products and that no more than 10% of your portfolio should be in any one structured product.

Further information

The minimum investment is £10,000. Please note that the deadline for this particular issue is 6 August 2010, however, a further issue is expected in the middle of August. If you want to be informed when the next issue is available please email us to this effect. You can either invest directly or through the Nucleus wrap platform if you are already using that for your investments. If you would like to invest in the Real Growth Plan (Issue Two) or find out further information you should visit www.arch-fp.co.uk/structured_products.php where you will find a brochure, standard terms and conditions and application form.

Please note that this information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances. If you are unsure about investing in a structured product then you should discuss the matter with a suitably qualified independent financial adviser such as ourselves.  The risks of investing in this particular structured product are detailed in the Real Growth Plan brochure which you should read. This plan is not a deposit account and is not guaranteed by any third party. Your capital is at risk from a fall in the FTSE 100 during the investment term. You will not receive any dividends from companies in the FTSE 100. Averaging of the final index levels may constrain your returns. If you do not understand any of the risks please discuss them with us before investing.

If you would like to receive advice about investing in the Real Growth Plan or structured products generally, please ask your usual Arch adviser, telephone 01483 204600 or email enquiries@arch-fp.co.uk.