Structured deposits have seen a strong and consistent rise in popularity, which has been emphasised by the continued pressures on fixed rate bond yields.
However, these are still a relatively new type of product and due to the wide choice available can sometimes be misunderstood. We therefore take an in depth look under the bonnet of this rapidly growing area and provide you with an overview of what the market currently has to offer.
First things first
The first point to make is that these fall under the umbrella of structured products of which there are, in the main, two types – the structured deposit and the structured investment.
Although both have some similarities, to talk of the two together is both unhelpful and misleading, and can confuse when each could be considered as providing a genuine solution since they have different features and work in different ways. We are only talking here about structured deposits.
What are they?
Structured deposits are essentially a combination of a deposit and an investment product where the return is dependent on the performance of some underlying asset, which in the UK is normally the FTSE 100 Index.
This is one of the main differences between structured deposits and fixed rate bonds. With the latter, your returns and the maturity periods are fixed, whereas structured deposits have variable returns and, in some cases, variable maturities as well. This flexibility in design results in a wide range of different structures, thus increasing the product choices available.
One of the key features is their status as deposits and the security and peace of mind that this entails. This is also why they are seen to sit alongside fixed rate bonds as a genuine alternative for savings.
This status brings with it the need to consider carefully which institution you wish to deposit your cash with, as you would with any other savings product. The credit rating of the financial institution should be seen as an important factor and since this a complex and subjective area, the use independent rating agencies such as Standard & Poor’s provide us with valuable guidance.
Other similarities with fixed rate bonds
Other similarities with fixed rate bonds are that structured deposits are meant to be held to maturity since your capital is designed to be repaid in full only at this time. If you withdraw your deposit before the maturity date you may lose part of your return and/or capital.
Deposit status also means that these plans are eligible for the Financial Services Compensation Scheme which affords protection up to £85,000 per individual. Although this does not distinguish them from fixed rate bonds, it does bring them on a level playing field.
Why such an increase in popularity?
Times have changed. The main reason for the shift of focus towards structured deposits has been the over-reliance on fixed rate bonds by savers who are now seeing the real value of their savings eroded at a time when they need it most.
Structured products combine capital protection with the potential to receive higher rates than those available from fixed rate bonds, and to even beat inflation. These are difficult times to say the least and it is the saver who is enduring the harsh reality of this more than anyone. Understanding the impact of low rates, especially over time, and giving full consideration to all of the options available, particularly using your Cash-ISA allowances, are all reasons which have shone a deserved spotlight on structured deposits.
A wide range of options
One final point which has also contributed to the rise of the structured deposit is the wide range of choice available in their design, be it the need for income, growth, or a combination of the two. This is certainly a major positive and allows the products to move with the economic climate, which is something outside of the control of fixed rate bonds.
However this should also bring with it a word of caution. With flexibility in design comes a wide range of complexity in how each product works and you should be sure you fully understand the product before proceeding.
The product brochures provide the main starting point and we at Fair Investment also produce our own fact sheets, and are available to answer any questions you may have on the products themselves.
The bottom line …
As with any savings product, there is always a trade off for receiving a higher rate of return and with structured deposits, this is made absolutely clear at the start of the plan. The two main downsides are that the deposit taker may go into liquidation and that the payout mechanism within the plan does not occur so you only receive your capital back.
This has to be balanced and compared to the upside which is inevitably a greater potential return than could be achieved by putting your money away for the same length of time with a similarly rated credit institution. Taking into account the current economic climate and the increased inflationary pressures on savings, there would seem to be a strong case to at least consider these as a compliment to the more traditional fixed rate savings.
No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.
These are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
© Fair Investment Company Ltd