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Guaranteed Structured Deposits – too good to be true? Maybe not…

By May 19, 2014February 12th, 2019No Comments

Many investors continue to be 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) many savers are not even receiving a return that protects them against inflation.

Understandably therefore, many people are looking at alternative investments in the hope that they can generate a more attractive return. However, with worries about stock markets around the world continuing to be volatile, security remains high on the list of priorities with many savers. It is unsurprising therefore, that ‘Guaranteed Deposit’ plans offered by a few providers appear an attractive solution.

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:

These plans can offer a gross fixed return of up to 30% over 6 years providing the FTSE 100 index is the same or higher at the end of the term 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.

Many of the plans available can be held as an Individual Savings Account (ISA), making the returns tax free. Deposit based plans are normally subject to income tax if the plan is not held within a Pension or ISA.

With interest rates likely to remain low for a number of years and then only due to rise gradually, 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 (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, therefore only capital you can be sure of not needing in the short term should be considered for this type of investment.

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.

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