Derivatives pep up yield

ABBEY LIFE has become the third company to launch a personal equity plan where income is generated through derivatives. The extra-income Pep will pay a monthly income set at 2 per cent above the base rate, up to a maximum income of 13 per cent. The income, currently 7.25 per cent, will be paid monthly.

Abbey Life's Pep will use the same techniques as Hypo Foreign & Colonial and Morgan Grenfell's high income Peps, where income is generated from the premium paid for futures and options. Both these funds offer 10 per cent income. Hypo Foreign & Colonial's fund has taken about pounds 400m since it was launched last year.

However, the Security and Investment Board is monitoring the Pep to make sure that the capital is not eaten up. Save & Prosper was forced to abandon the launch of a similar product at the end of last year because it feared that under certain investment conditions the capital would be completely used up.

Abbey Life said that linking the level of income to the base rate would cut down on the risk. Paul Laband, managing director of Abbey Life Investment Services, said: 'The difference is that the Hypo Foreign & Colonial Pep aims to provide a fixed income with a variable level of risk, while our product offers variable income with a fixed level of risk.'

Abbey Life is also launching a managed income Pep invested in seven unit trusts and cash deposits, and the dividend and growth Pep which offers a long-term rising income.

Charges are 6 per cent at the initial stage, plus up to 1.5 per cent annual.