Structured deposit products explained | moneyfacts.co.uk

Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 07/12/2018

At a glance

  • Structured deposits offer exposure to stock market growth with the potential to either earn a return or have have your capital returned
  • They provide an opportunity for better returns than through a traditional savings account, but no guarantee of any return being achieved.
  • They should not to be confused with structured investments, which can potentially see your capital being eroded if the stock market does not perform to required levels

What is a structured deposit?

A structured deposit has a set term like a fixed term deposit account, however instead of paying a guaranteed rate of interest, a structured deposit offers a higher level of interest that is conditional on the performance of a stock market index, such as the FTSE 100.   

Structured deposits are generally designed for investors that aren’t satisfied with the interest rates offered by fixed term deposits. They are willing to take the risk that they may receive no interest, in return for the potential to achieve a higher rate of interest if the index performs in a certain way.   

Some structured deposits only pay interest if the index rises, whereas some “defensive” structured deposits offer a lower interest rate which can still be paid as long as the index doesn’t fall by a certain amount.

Structured deposits are similar to fixed term deposit accounts, in that you must commit your money for a certain amount of time.

Is now a good time to get a structured deposit?

With the interest rates on savings at nearly all-time historic lows, many savers are looking at how they can improve the returns on their deposits.
Structured deposits offer savers a chance to earn a higher interest rate than is available from fixed term deposit accounts.
When deciding between a fixed term deposit account and a structured deposit, savers therefore need to decide whether they want a lower guaranteed interest rate, or a higher conditional interest rate.

How do structured deposits work?

Structured deposits are similar to fixed term deposit accounts, in that they have a fixed term and they are a deposit with a bank. However, structured deposits sacrifice guaranteed interest payments for higher interest payments that are conditional on the performance of a stock market index. Therefore, structured deposits may pay you a higher interest rate than you would get from a fixed term deposit account, but there is a risk that they may pay you no interest at all.

What are the risks of structured deposits?

One of the biggest risks of a structured deposit is the risk of receiving no interest if the stock market index does not perform in a certain way; for example if it hasn’t risen over the term or if it has fallen by more than a specified amount over the term.  

Structured deposits are designed to be held for the full term of the Plan. Savers can access their structured deposit funds before the agreed maturity date of the structured deposit, however if they do this the amount that they get back will depend on the market value of the structured deposit at that time, which could be more or less than the amount that they invested.  

As is the case with all cash savings products, if the deposit taker becomes insolvent during the term of the structured deposit, savers could lose some or all of their money and in this instance would need to seek compensation from the Financial Services Compensation Scheme (FSCS), subject to their eligibility as a claimant.

Where can I get a structured deposit?

If you are considering a structured deposit, then you can either invest via a financial adviser or apply online through a brokerage website.
A financial adviser may charge you a fee for their services, and they can help ensure that this type of investment is right for you, by giving you advice on the decision to invest. They are also responsible for making sure you understand the risks of investing in this type of product.

If you choose to go online, then you will be making the decision to invest on your own. This means you will not receive any guidance or advice if a structured deposit is right for you.

Seek professional advice before investing

It is critical that you only invest in a structured deposit if you fully understand how the product works and fully understand the risks involved. If you are unsure about anything related to the product, you should seek advice from a financial adviser before investing. A free service, quickly connect to over 27,000 experts with the help of Unbiased.co.uk

 

Do structured deposits have the same protections as fixed term deposit accounts?

Like a fixed term deposit account, structured deposits are deposits, which means that your capital is protected (subject to your eligibility under the Financial Services Compensation Scheme). In the event that the deposit-taker is unable to meet its obligations, structured deposits qualify for the Financial Services Compensation Scheme protection of up to £85,000 per person (depending on your eligibility) in the same way as your bank or building society account does.
However, as mentioned above, when you invest in a structured deposit, there is a risk that you may receive no interest at all. If that happens, you would have foregone the guaranteed rate of interest that a fixed term deposit account would have paid you.

What can be invested into a structured deposit?

Each product will have its own specific rules but in general these accounts will accept:

  • Direct investments
  • Cash ISA funds for the current tax year
  • ISA transfers
  • SIPP/SSAS pension arrangements
  • Trustee, corporate, charity, offshore bond and nominee investments
  • On behalf of a child

What is the FTSE 100?

The FTSE 100 Index is a widely used benchmark for the UK stock market. The Index measures the performance of the shares of the 100 largest companies listed on the London Stock Exchange. The FTSE 100 is an international index which includes HSBC, Vodafone, Royal Dutch Shell and GlaxoSmithKline.

Do structured products include derivatives?

This is a common misconception. Structured deposits are the same as fixed term deposit accounts, in that there is a legal obligation for the deposit-taking bank to pay you the interest rate that you signed up to dependant upon the performance of the relevant equity index. The deposit-taking bank will usually purchase derivatives themselves, in order to generate the interest that they owe you, but they don’t have to.
If the deposit-taking bank does purchase derivatives to generate the interest that they owe you, the derivatives belong to the deposit-taking bank, not to you as an investor.

Moneyfacts tip

Moneyfacts tip Michelle Monck

If you’re looking for a structured deposit, make sure you don’t take out a structured investment by mistake. Structured investments do not offer the same protection about the return of capital as structured deposits.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

At a glance

  • Structured deposits offer exposure to stock market growth with the potential to either earn a return or have have your capital returned
  • They provide an opportunity for better returns than through a traditional savings account, but no guarantee of any return being achieved.
  • They should not to be confused with structured investments, which can potentially see your capital being eroded if the stock market does not perform to required levels

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