Interest rates are low and inflation is high, not a great combination for savers. With the Bank Rate clocking-up two years at 0.50 per cent and the Consumer Prices Index (CPI) running at 4.40 per cent savers are increasingly on the look-out for competitive deals.
As the end of the tax year draws closer, banks and building societies have upped their game to offer improved rates for cash ISA savers, helping ease the pain of low interest rates and rising prices. The average cash ISA rate rose above two per cent in February, while some instant access and fixed term cash ISAs are offering savers Annual Equivalent Rate (AER) interest at three per cent and above.
Despite this, many cash ISA rates still fail to beat inflation. Structured deposit plans are alternative cash ISA options that could potentially offer a 'real' rate of return. Capital protected – which means your initial investment is not at risk – structured deposit plans are a middle ground between a savings account and stock market linked investments.
There are various types of structured deposit plans available, all of which can be used in a cash ISA and are eligible for the Financial Services Compensation Scheme (see FSCS for more details).
Growth cash ISAs
Investec has two FTSE 100 deposit plans available offering the potential to return up to 35 per cent after 5 years and up to 15 per cent after 3 years, depending on the performance of the FTSE 100 over the term of the plans.
Both plans are capital protected, but the return of your capital and returns from the plans depends on the ability of the deposit taker (Investec Bank plc or Royal Bank of Scotland) to repay your money. The plans are also eligible for the Financial Services Compensation Scheme (FSCS) deposit protection scheme covering individual savers in the event of an institution defaulting to the limit of £85,000 per institution.
Fair Investment Company savings and investments analyst Julie Smith says these structured deposit plans are interesting for savers looking to tie their cash ISA allowance up for a fixed term with capital protection.
“These plans offer competitive potential growth when compared to traditional cash ISAs currently available, and as long as the plan is held for the full term the risk to capital is similar to that of cash savings.”
However, investors should be aware that, unlike cash ISAs, the potential return from structured deposit plans are often linked to the performance of an index.
Take advantage of any growth in the FTSE 100 with capital protection
A range of five and six year structured deposit plans that offer capital protection and potential returns based on the performance of the FTSE 100 Index are also available as cash ISAs.
The Legal and General 6 Year Growth Deposit Bond 6 aims to return capital and a minimum growth of 15 per cent over the full term of the plan, or, if greater, 100 per cent of capital growth in the FTSE 100 Index up to a maximum of 50 per cent of the initial investment. Royal Bank of Scotland is the deposit taker for this plan from L&G.
The Investec 5 Year FTSE 100 Deposit Growth Plan 7 offers exposure to the growth of the FTSE 100 over the term of the plan, with capital protection and a maximum return of 60 per cent of your initial investment. Investec Bank is the deposit taker for this structured deposit.
Julie Smith said: “These structured deposit plans are known as tracker deposit structures. They offer a similar risk profile as cash in terms of the original capital but offer greater potential growth linked to equity markets, without the risks of investing directly in equities.”
As the investments are for a fixed term, savers should be comfortable depositing their capital for the full term of the investment and with the potential returns being linked to the performance of an index.
Early maturity potential
Structured deposit plans that have the potential to mature early if certain criteria are met are often called ‘kick-out’ plans. Again, these are capital protected.
The Investec FTSE 100 Kick-Out Deposit Plan 19 has the potential to mature early in year's two, three and four paying five percent for every year the plan has been in force, if the FTSE 100 anniversary level after two, three, four or five years is higher than the initial level of the index. (Request an information pack for more information).
Income from structured deposits
The Investec FTSE 100 Income Deposit Plan 17 is a five year plan which offers the potential for 4.50% annual income, dependent on the level of the FTSE 100. The plan will pay this level of income if the FTSE 100 remains at or above 50 per cent of its level at the start of the plan.
Income payments from the plan will end if the FTSE 100 falls below 50 per cent of its level at the start of the five year term; however, the performance of the FTSE 100 will not affect the return of capital which is dependent on the deposit taker, Investec Bank, being able to repay investors. This plan is also eligible for the FSCS deposit protection scheme.
No news, feature article or comment should be seen as a personal recommendation to invest.
Different types of investment carry different levels of risk and may not be suitable for all investors.
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. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of this type of investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Compare these cash ISA alternatives using the table below:
© Fair Investment Company Ltd