£150,000 to Invest, £60,000 Needed in Three Years

Term against need. Alan expects to need £60,000 in about three years. A six-year product cannot be relied on to deliver that money at the right time; if he has to sell or surrender early, he may receive less than he invested or face an early exit charge.

Capital risk. A 45% barrier means that if the index falls by more than 45% at the measurement date, he loses the fall in full - potentially most of his capital. That is inconsistent with a cautious investor who has never held equities, and with funds earmarked for a house purchase.

Counterparty risk. The product is an obligation of the issuing bank, not a deposit. If the issuer fails, Alan loses his money, and the Financial Services Compensation Scheme does not cover the note itself. A- is investment grade but not risk-free, and £150,000 in one issuer would far exceed the £85,000 per person, per firm protection limit even where FSCS applies. FSCS would only respond to a claim against the adviser firm for unsuitable advice.

Complexity and understanding. Barrier levels, participation rates and averaging dates are difficult to explain and to compare. Under the Consumer Duty, the adviser must be able to show Alan understands the product, and that the product is in the right target market.

Conclusion: the structured product is not suitable for the money needed in three years and is difficult to justify for the remainder given his profile.

Onshore investment bond

• Tax is paid within the fund at 20%, and the fund grows free of further UK tax on capital gains and income.
• Gains on encashment are chargeable gains, treated as savings income with a 20% tax credit. As a basic-rate taxpayer, Alan would have no further tax to pay, provided his income plus gain stays within the basic-rate band.
• He can withdraw 5% of the original investment each year for up to 20 years without an immediate charge, but this is a deferral and the remaining value is still taxable on final encashment.
• A five-year bond has early surrender charges and is not suitable for money needed at year three, and total charges may outweigh the tax benefit for a basic-rate taxpayer.

Pension contribution

• The £100,000 figure is not achievable. Tax relief is limited to 100% of relevant UK earnings, which are about £26,000, or £3,600 if lower. A £100,000 gross contribution would only attract relief on the earnings limit, though the scheme may accept the excess.
• A £26,000 gross contribution would cost a basic-rate taxpayer £20,800 and benefit from tax-free growth, with 25% of the fund normally available as tax-free cash, subject to the lump sum allowance, and the rest taxable in future at his marginal rate.
• The money would be locked up, which conflicts with a three-year need, and a contribution of this size at 62 offers little time for growth to offset the loss of access.

Neither option solves the short-term need. The £60,000 should be held in cash or fixed-term deposits within the ISA or in a deposit account.

Recommendation: split the money by time horizon rather than by product.

• Keep £60,000, plus a contingency buffer, in cash - a fixed-term deposit ladder timed to the expected house purchase, and the cash ISA allowance for the year, so the money is available whatever the markets do.
• For the remainder, if he is willing to accept some investment risk, consider a diversified multi-asset fund at a risk level matched to a properly assessed attitude to risk and capacity for loss - not a single-index structured product. If he is not willing, retain cash or short-dated fixed interest.
• Treat the pension question separately: a contribution limited to his earnings can be efficient, but only from money he does not need for the house purchase.
• Address the missing long-term care provision, since his £30,000 of savings would not cover a prolonged care need.

Documentation: record the fact-find and risk assessment, including what 'cautious' means for him and his capacity for loss; the reason the structured product was rejected; the charges and the loss of access; the tax calculations for the bond and pension; and his stated priorities and the possibility the house purchase does not happen. Under the Consumer Duty the file must show the advice is consistent with his objectives and that he understands the risks, so a written suitability report, with a follow-up conversation, is essential.