Savers who want to maximise their returns and grow their income in real terms need to consider alternative options to the current low interest rates available from cash savings.
One option may be Premium Bonds, which allow you to invest a lump sum for the potential to win a maximum cash prize of £1,000,000. Savers that aren’t lucky enough to win a cash prize will still retain their initial investment – however the value of this will reduce over time due to inflation.
Another option to protect your capital with the potential of a higher return than available from a traditional savings account is a structured deposit. A structured deposit is a fixed term deposit that pays interest that is conditional on the performance of a market index, usually the FTSE 100. Most traditional cash savings products pay a lower interest rate that is guaranteed, whereas structured deposits pay a higher interest rate that is conditional on the market index.
Structured deposits vary to allow savers to choose how much risk they are prepared to take in exchange for a higher return. For example, some structured deposits offer a lower potential interest payment, but will pay it even if the market index has fallen by a certain amount over the term. Other structured deposits offer a higher potential interest payment, which will only be paid if the market index rises. While structured deposits offer higher interest rates than traditional cash savings products, they also feature higher risks; specifically the risk of paying no interest at all if the market index doesn’t perform in a certain way.
At present, savers can find structured deposits from Investec Bank plc offering interest of up to 4.5% per annum over a six-year term and up to 3.2% per annum over a three-year period. This compares to the best fixed rate bonds for five and three-year terms currently available at 1.60% from Bank of London and The Middle East and 1.51% from Al Rayan respectively.
Structured deposits usually pay one potential interest payment at the end of their term (i.e. 27% after six years), however some structured deposits offer the potential for regular interest payments instead.
Funds in a structured deposit held with a UK authorised bank are protected under the Financial Services Compensation Scheme (FSCS) up to £85,000 in the same way as traditional savings accounts (subject to the eligibility of the investor.)
Michelle Monck, finance expert Moneyfacts.co.uk said “It’s understandable that savers will be looking for ways to improve their returns during this time of extremely low interest rates. Structured deposits offer the potential of higher rates without risking capital but are a long-term investment. Savers need to be sure they can tie-up their funds for a long period and that they may not earn any return at all.
“Structured deposits are a more complex type of investment and savers should only consider these if they are comfortable with their deposit being linked to a market index, and as part of a diverse investment portfolio. Savers must also take care not to confuse structured deposits, which protect their capital, with structured products, which place their capital at risk. “
Savers can see a full range of Investec Bank plc structured deposits and find out more about how structured deposits work in our guide.
Structured deposits are not currently available directly from the banks.
Savers must either use an adviser or an online broker. Online brokers are convenient but rely on the savers being responsible for understanding their product choices. Any saver that is unsure if these products are right for them should look to speak to a financial adviser instead.
Scams are on the increase as fraudsters seek to take advantage of savers looking for decent returns on their savings. Savers should be careful of using search engines such as Google to search for investment opportunities as sometimes the adverts presented are not genuine. These usually take savers to a cloned website that looks like the bank’s website.
Savers need to make sure they only click on links from trusted sources and cross-check that the website address they are visiting is legitimate. Savers should look to cross-check the address with other sources and save genuine websites in their favourites. Savers can read more in our tips to stay safe online.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.