Structured Deposits

28.07.2020
Scott Hansell
Financial Planning

Stock markets have been volatile to say the least over the last few months, and in our opinion, will remain so until the Coronavirus pandemic is brought under control and the economic fallout assessed.

Historically low interest rates have been slashed further and look to remain low for the foreseeable future.

So, where now for the savers who have had a rough ride really since the Financial Crisis in 2008?

Investment via global stock markets have been a popular option for many chasing an ‘income yield’; however, what options do investors have when their appetite for risk is limited and prefer the protection of cash deposits?

A solution to this could be structured deposit plans. A structured deposit plan is similar to a traditional fixed term deposit account from a banking institution. Instead of paying a guaranteed rate of interest, it offers a potentially higher level of interest over the term that is determined by the performance of a stock market index. In essence, it offers stock market type returns with capital protection. Too good to be true it seems - well, the main drawback is that if the stock market index does not perform to expectations, you would generally receive your capital back with no interest payable. Given that the best three year fixed term deposit account on the market today pays just 1.25% AER (Annual Equivalent Rate), I believe that for some, it is a risk worth considering. Especially as it is likely that inflation will turn the quoted 1.25% into a negative real rate of return.

Structured deposit plans are ‘deposit’ based investments, and as such they do qualify for the Financial Services Compensation Scheme (FSCS). This would protect you from counter party risk (for example – the financial institution that holds the plan going insolvent) up to £85,000 per institution and individual.

Structured deposit products should not be confused with structured investment plans, which are generally not capital protected and are more complex to understand

Structured deposit plans could also be held within various tax efficient product ‘wrappers’, such as a Cash ISA (you can also transfer-in from existing low earning interest bearing accounts) and Pensions. Outside of these ‘wrappers’, for a UK tax resident and domiciled individual, any return made at maturity is expected to be subject to UK Income Tax legislation.

A current offer being marketed via a notable UK registered banking institution offers a return of 9.6% over a three-year term (3.2% per annum non compounded) based on the performance of the globally influenced FTSE 100. The FTSE 100 would need to be higher at maturity than the starting level, otherwise you would just receive your original capital back. The product charges are implicit in the return quoted. Access during the term is limited and if you do access early you may not receive your capital back, therefore it is imperative you can invest for the full term. 

Professional financial advice should be sought, so that your circumstances/suitability can be assessed in full. 

To summarise, structured products could be right for you if:

  • You want at least a full return of your initial deposit at maturity
  • You are looking for a plan with returns linked to the performance of stock markets
  • You do not need access to the money over the plan term
  • You want a tax-efficient return using your ISA allowance or via some Pension arrangements, such as a SIPP (Self-Invested Personal Pension)

They would not be suitable if:

  • You want a regular income and dividends
  • You may need immediate access to your money before maturity
  • You cannot commit to the full plan term
  • You want a guaranteed fixed rate return on your deposit
  • You want to add to your deposit on a regular basis. These plans run in tranches and therefore may not be immediately available
  • You do not want to have money held in a UK onshore asset that is subject to UK tax rules

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