Is earning 15% on your savings too good to be true?

Savers have had little to shout about over the past few years, since base rate hit a rock-bottom 0.50% and savings returns fell into the doldrums. And if this wasn’t bad enough, banks and building societies have been slashing their rates even further over the past few weeks.

Admittedly, the latest inflation figures offered savers a small glimmer of hope, as the Consumer Prices Index (CPI) eased back from 2.6% in July to 2.5% in August, and the Retail Prices Index (RPI), which includes housing costs, nudged down slightly from 3.2% to 2.9%.

However, inflation still remains higher than the Bank of England’s target rate of 2%. At the same time, fuel and transport costs remain disproportionately high, making saving a real struggle for some individuals.

What is happening to savings rates?

Savers have had to endure a succession of rate drops in recent weeks, with banks and building societies rushing to pull market leading deals off the shelves, replacing them with lower-paying alternatives.

This has been highlighted again in the past few days with yet another round of cuts.
Nationwide building society has reduced the rate on its MySave Online Plus from 2.90% to 2.75%, while ING Direct has cut the rate on its Savings Account from 2.90% to 2.80%, just days after it reduced the rate from 2.99% to 2.90% on September 5.
Santander has also waded in by lowering the rate on its One-Year Fixed Rate ISA from 3.00% to 2.75%, and also replaced its eSaver Issue 6 paying 3.00%, with a new Issue 7, paying 2.80%.

Derbyshire building society has also withdrawn its NetSave Issue 5 paying 2.90% and replacing it with Issue 6 paying 2.75%.

All kinds of savings accounts – including easy access, fixed rate bonds and even tax-free ISAs have been hit by rate cuts causing more all-round suffering to savers already struggling with long-term paltry rates.

In this instance, perhaps you are considering looking into structured bonds as a safer haven for your hard-earned cash? After all they offer handsome returns while protecting your capital. But on the other hand, they can also be hugely complicated, so you will need to do your homework before signing up. The good news is, you can start it here.

What are structured products and how do they work?

Structured products offer returns linked to the stock market while also promising to protect all of your capital. They offer a fixed rate of income or capital growth over a specific term of between three and six years and are reliant on the performance of the linked stock market index (typically the FTSE 100 index).

How are returns calculated?

With structured products, the ‘return’ is the change in the linked stock market index between the start and end of the plan. Generally speaking, so long as the index does not fall by a specified amount during the investment period, or the product performs in line with expectations, the guaranteed income or growth will be paid.

That said, the way in which returns are calculated is often hugely complex, and involves complicated financial instruments known as derivatives which are used to hedge risk.

Crucially, unlike a standard fixed rate bond, these plans have variable returns – and there are risks, so you need to go in with your eyes open.

What are the benefits?

A structured deposit offers the potential to receive much higher returns than those paid on a standard fixed rate bond, as returns are linked to the stock market. You also get capital protection as the overall investment exposure is limited meaning you get your money back – irrespective of the performance of the index – at the end of the term.

The plans are designed to suit different types of saver; some come with the potential to mature early, while others offer the potential for a high level of income each year.

The type of saver best suited to structured products is someone who has an appetite for taking a controlled amount of risk, as these plans provide a halfway house between having nearly no risk, and taking full risk in a standard investment. 

What are the disadvantages?

While structured products appear to offer both the security of a deposit account and the opportunity to earn juicy returns from shares – you do need to proceed with care.

A structured product will offer ‘maximum potential return’ but the maximum yield or return is not guaranteed, and is subject to the index or investment performing as required in the product’s terms and conditions (see examples below).

Crucially, the products are designed to be held for the full term, but once you have held the plan for five or six years, you may have lost money once inflation is taken into account, in the event there is no stock market growth.

You also need to bear in mind that while capital protection means your money is safe, in return for this, you are unlikely to get the full benefit of any increase in the underlying index – or the payment of dividends. This can make up a sizeable chunk of overall equity returns and particularly over a period of five or six years.

Initial minimum deposits are also higher than standard savings accounts, ISAs or fixed rate bonds – requiring as much as £10,000. Furthermore, many accounts can still only be opened and operated by post.

In addition, capital protection will depend on the ability of the deposit-taker to repay your money, so you need to check out your provider’s credentials carefully. If the company backing the plans goes bust or defaults, you could lose some or all of your money – regardless of the performance of the underlying indices.

As a saver, you need to be aware that the flexibility offered by these products also makes them complicated, so you need to fully understand the product before making any decision.

You should also ensure structured products form just a part of a balanced portfolio.

Now you are armed with the basics, what kind of structured products are out there?

Growth deposit plans

If you’re looking for growth with your structured bond, Investec has a product called the FTSE 100 three-year Deposit Plan 36. The plan will pay a fixed return of 15.00% after three years– as we refer to in our headline. But this is still only on the condition that the FTSE 100 is higher than its starting value at the end of the three-year term. If the FTSE is lower, no growth is paid, and you will only receive your original capital back.

Investec also has a five-year plan, the Investec Kick Out Deposit Plan 31 which offers a maximum potential return of 5.00% for each year it’s been in place and can mature early from year two provided the FTSE 100 is higher than its starting value. If these conditions are not met, you will only receive your original capital.

Investec also has another five-year plan, the Investec FTSEE 100 Deposit Growth Plan 19 – Option 1, which places no limit on the maximum potential return. This plan will return 100% of any growth in the FTSE as measured as the value at the start and end of the investment term. If the FTSE is lower at the end of the term, you will only receive a return of your original capital.

All three of these plans can only be operated by post, and the minimum direct deposit is £3,000; the deposit taker for each of these is Investec.

Legal & General has a six-year plan, the Growth Deposit Bond 16 which offers a maximum potential return of 40% after six years. This plan will return 100% of any rise in the FTSE 100 measured over the investment term, capped at 40%. If the FTSE is lower or has grown by 7.50%, the plan will pay a fixed return of 7.50%, as well as a return of your original capital. The plan can only be operated by post, and the minimum direct deposit is £500. The deposit taker is Cater Allen, which is part of Santander UK.

There’s also another six-year plan from Cater Allen – the Enhanced Growth Plan 12, offering potential maximum returns of a whopping 50% after six years. The aim of this plan is to provide a full repayment of capital at maturity plus 1.5 times’ any growth in the index after six years, with a maximum return of 50% of your original investment. The plan can only be operated by post, the minimum direct deposit is £5,640, and the deposit taker is Santander.

Income deposit plans

If you’re looking for income, Meteor’s Dual Index Income Deposit Plan offers a maximum potential yield of 8.40% per annum over a term of six years. The plan pays an annual income of 8.40% for each year the FTSE 100 and the S&P 500 stays between the required limits.

If the FTSE or S&P falls outside these limits, you will not receive any income for that year.

Meteor also offers another six-year plan, the FTSE Income Deposit Plan offering a maximum potential yield of 6.00% per annum. This plan pays an annual income of 6.00% for each year the FTSE stays between 4,750 and 7,000. If the FTSE falls outside these limits, you will not receive any income for that year.

Both plans are operated online and require a minimum direct deposit of £10,000. The deposit taker for both plans is the Royal Bank of Scotland.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We're free, independent and compare all UK credit cards, as well as offering exclusive deals you can't get anywhere else. Contact at Moneysupermarket House, St David's Park, Ewloe, Flintshire, CH5 3UZ. © Ltd 2012.

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