How do Kick Out Investment Plans Work?

Structured "Kick Out" investment plans offer investors the potential of an early maturity dependent on the underlying asset e.g. normally an Index such as the FTSE 100.


To help explain how these investments work the following is an example:

A 5 year term "kick out" investment plan linked to the FTSE 100 provides the potential Compassfor early maturity after years 1,2,3 and 4.

To achieve early maturity the FTSE 100 average closing levels for the 5 business days up to and including the set "kick out date" must be higher than the initial index. The "Initial Index" level is the closing level of the FTSE 100 on a set day at the beginning of the plan. If the plan matures early the investor will recieve a predefined maturity amount e.g. 10% times the number of years the plan has been active (usually not compounded). So if the plan "kicked out" at the end of year 3, the return would be 30%.

If the plan does not "kick out" then it will run for the full 5 year term at which time the final return will depend on the "Final Index" level. The "Final Index" level for this example is based on the average of the closing levels of the FTSE 100 on each business day over the last 6 months of the plan term. If the "Final Index" level is higher than the "Initial Index" level then the plan will pay out the original capital invested and for this example 1.2 times any growth in the FTSE 100 above the "Initial Index" level with no upper limit. If the "Final Index" level is lower than the "Initial Index" level then capital may be at risk.

For the purpose of this example capital would be at risk if the FTSE 100 has fallen by more than 50% during the plan term from the "Initial Index" level, and the "final Index" level is lower than the "Initial Index" level.

There is also a risk that the counterparty to the plan (normally a UK bank) may not be able to repay your monies and any stated returns.

Features of Kick Out Investment Plans

  • Provide investors with an opportunity to make an attractive early return if the plan requirements are met.
  • The return proceeds will normally be subject to CGT and not income tax (tax treatment rules are subject to change).
  • Suitable for investors who are comfortable with the uncertainty of plan maturity and therefore are not in need of the capital if early maturity does not happen.
  • These types of plan are normally capital at risk plans so it is important you understand the risk to capital.
  • You need to be comfortable with the counterparty and the possibility that if the counterparty defaults you may not get your money back.
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