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Financial planningFor individuals

Guaranteed Deposit Investments – too good to be true? Maybe not…

By January 13, 2012February 12th, 2019No Comments

Many investors are becomingly increasingly disappointed with the return they are receiving on cash held in traditional deposit accounts. With even the best accounts only paying around 3% (before any tax liability is taken into account) savers are not even receiving a return that protects them against inflation.

Understandably therefore, many people are starting to look at alternative investments in the hope that they can generate a more attractive return. However, with worries about the American trade deficit and the eurozone crisis making stock markets around the world nervous, security remains high on the list of priorities for such investors. It is unsurprising therefore, that ‘Guaranteed Deposit’ plans offered by many providers which are winning a widespread following.

Commonly, this type of investment is often referred to as a “guaranteed” investment as one of the key selling points of such investments is that your initial capital is protected, providing certain conditions are met. Perhaps the simplest way to explain the investment is to use an example.

A number of Providers are currently offering investments called FTSE 100 Deposit Plans. As you’ll gather from the title, the plan is linked to the FTSE 100 index – the main points are:

  • Some plans offer a gross fixed return of up to 20% over 6 years providing the FTSE 100 index is higher at the end of the term than it was at the beginning of the plan, and some plans offer up to 50% of the growth in the FTSE providing the FTSE is higher than it was at the beginning of the plan
  • If the FTSE has fallen, your original capital will be returned, but you won’t receive any growth
  • The plan can be held as an Individual Savings Account (ISA), making the returns tax free, or gains could also be tax free if an investor used his or her annual CGT allowances
  • Larger amounts can also be invested tax efficiently through a Self-Invested Personal Pension (SIPP), or by using a Small Self-Administered pension scheme (SSAS).

With interest rates likely to remain low the returns on these types of investments are likely to easily outstrip the returns on a traditional savings account – especially when you realise that any gain in the FTSE (however small) will trigger a positive return stated in the plan offering. However, before investors rush to sign up, there are notes of caution:

  • If the FTSE falls in value, only your original investment is returned – so any interest you would have gained had the money been left on deposit is lost
  • And whilst investments like this are eligible for the UK Financial Services Compensation Scheme (now up to £85,000 per person, per authorised firm) return of your capital does ultimately depend on the financial solvency of the underlying institution
  • In addition, you need to leave your money invested for the full term of the plan: whilst it is generally possible to encash this type of plan early it is not advisable, as then the original guarantees do not apply

So investments such as these are not right for every investor, and they should never be used for the whole of any saver’s investment portfolio. But they do have significant advantages, and can play an important part in an overall financial planning strategy. In addition they can be very tax efficient, making them attractive to investors who have already used their ISA allowance for the relevant tax year.

We will happily explain how this type of investment could form an integral part of you overall financial planning. Please don’t hesitate to contact us if you would like further details.