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Structured Deposits – A Refuge for the Risk-Averse Saver?

14 June 2018

With bank deposits far from mitigating the capital erosion effects of inflation, is it time regular savers looked beyond high-street savings accounts to the world of structured deposits? asks Ian Lowes, MD of Lowes Financial Management.

In March 2018, the Consumer Prices Index (CPI) twelve-month rate was 2.5%. Meanwhile, the Bank of England Base rate remains pitifully low at 0.5%, with no signs of a great change in the weather. This is great for borrowers, but where has it left savers for the past ten years? £100 put in your piggy bank in 2008 would by now have lost around a quarter of its purchasing power. The days when most high street bank accounts provided some shelter from inflation are a decade behind us, yet many are not taking their capital elsewhere.

Most structured deposits carry no more risk to an investor’s capital than a fixed-term deposit with the same bank, yet the former often potentially yield considerably greater returns. Capital in structured deposits with UK banks, as in deposit accounts, is only at risk if the bank defaults; even then it is covered by the Financial Services Compensation Scheme up to £85,000 per institution per person.

Some additional risk concerns the interest on savers capital; where you are guaranteed some interest accrual on a bank deposit, UK structured deposits typically incorporate a link to the FTSE 100 Index. For a current example, the Investec FTSE 100 3 Year Deposit Plan 5 offers 13% interest at the end of three years, provided that the FTSE 100 Index is above the level it was at when the plan began: that’s an annualised return of 4.16% per annum.

More cautious savers who are prepared to accept longer terms may find the FTSE 100 Defensive Kick-Out Deposit Plan 3 more attractive. Also by Investec, the plan offers 4% per year for up to six years, but with the additional feature that the plan will mature early, if the FTSE 100 Index is above a reducing reference level. That’s a maximum return of up to 24% at the end of term (3.65% annualised).

The main argument against structured deposits is that there is a chance the investor will end up with only their capital being returned to them if the underlying index does not perform favourably, thereby leaving them entirely exposed to capital erosion through inflation. However, this argument has never been weaker, because returns on the conventional alternatives have rarely been lower than they are now – almost all numbers very close to zero, and none above 3% per annum, so risking a few percent at best.