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Structured Deposits A consumer’s guide, produced jointly by TISA and the UK Structured Products Association. You may have heard about structured deposits from your financial adviser or in the press, and be wondering whether they could be right for you. This guide will help you decide whether structured deposits could fit in well with the other savings you have. This is a starting point only. If you are considering putting money in a structured deposit, please make sure you read and understand the specific literature for the product. And, if you are in any doubt, you should speak with a financial adviser.
What are structured deposits? You may already be familiar with a cash deposit account such as a savings account you might hold with a bank. The account lets you deposit and withdraw money, and your bank may pay you interest on any positive balance you hold.
A structured deposit is quite different. It typically offers higher potential returns than a cash deposit, but it also involves more risk. You need to put money into the account for a fixed term (typically 5 to 6 years). At the end of this time, you will receive your initial deposit and possibly a return. Rather than simply receiving the interest that most cash deposits pay, your return may depend on the performance of another financial variable, such as the inflation rate, company shares or the FTSE 100 Index.
What is it? A fixed-‐term deposit account paying a return linked to how
another financial variable, such as the FTSE 100 Index,
performs.
Who is it for? Consumers who are willing to
give up the interest on a standard deposit for a
potentially higher return linked to the relevant
financial variable. Key Features
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All structured deposits are slightly different, but please read about the following features that they have in common:
They are meant to be held for a fixed term
Once you have made your deposit, you will not be able to add more money during the fixed term. Equally, you will be expected to leave your deposit in the account until the end of the fixed term. Most structured deposits allow you to withdraw your money early if you need to, but this could mean you receive a lot less than you originally put in. So it is important that you only put money in a structured deposit if you are confident you can afford to keep it tied up for the full fixed term. And you must be sure you are comfortable with what would happen if you needed to withdraw your money unexpectedly or in an emergency.
They protect against negative returns
If you hold a structured deposit for its full term, you may receive back at least your deposit, regardless of what happens to share prices or interest rates. This gives you less exposure to stock market falls than if you were holding just shares.
They may be covered by the Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is an independent body, set up by the Government, that offers compensation when you lose money as a result of a participating financial firm (also called a counterparty) going bankrupt.
Deposits, including structured deposits, may be covered
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by the scheme, but some other financial products (including the similarly named structured investment plans) may not be. This means that if the bank or building society holding your structured deposit goes bankrupt, you may be eligible for FSCS compensation if it is a member of the FSCS.
The FSCS scheme protects only up to £85,000 of deposits for each person with an eligible financial firm or any group it may belong to (see also ‘What are the risks?’). There are specific rules about when you can and cannot claim compensation, full details of which can be found at www.fscs.org.uk.
Their returns can be tax free within an ISA
The return you receive from a structured deposit is subject to income tax, the rate of which will depend on your personal status. However, many structured deposits are also available for current tax year ISA subscriptions or transfer of previous or current annual ISA allowances. By holding your structured deposit in an ISA (up to your annual allowance), you will not need to pay income tax on any returns, if you are eligible to subscribe for an ISA.
They have subscription deadlines
Structured deposits are usually only available during a specific marketing period – usually 6 to 8 weeks long. If you miss the deadline, you will not be able to deposit. However, most providers will offer a new structured deposit with similar terms soon after. The returns on the new structured deposit may be different from the previous one, depending on how markets have moved in the meantime.
What are the risks? It is important that you understand the risks of structured deposits before deciding to put money in one. The following list is not meant to be complete, so if you are in any doubt as to whether structured deposits are right for you, you should seek financial advice.
You must be prepared to leave your deposit untouched for the full fixed term otherwise you may get back less than you put in
A standard cash deposit account will repay your deposit in full, regardless of when you withdraw. But structured deposits are different because their value during the fixed term depends on many factors, including interest rates, the creditworthiness of the deposit-‐taker and any ups and downs in the value of the financial variable to which the return is linked. Obviously, you would get your money back plus the potential returns if you held your deposit until maturity. But the amount you would get back if you needed to withdraw early may vary significantly. And some structured deposit providers may also charge an exit fee for early withdrawal.
There is a risk that you will receive no return on your deposit
For example, if you are promised a return linked to how the stock market performs, and it falls during the fixed term, then your return could be zero (assuming there is no minimum return) so you will just get back your deposit. In this case you would have been better off putting your money in a standard deposit account paying an interest rate. You must be comfortable that this is a risk you are willing to take, and that receiving no interest at all would not cause you financial difficulties. You should also check how returns are calculated over the period of the product and whether this is based on specific points in time or averaged over the whole term of the deposit.
Inflation could erode the value of your deposit
Inflation is the rise in the price of goods and services over time. It means that your money will be able to buy less in the future than it does today. If you were to put money in a structured deposit and there was high inflation over the fixed term, your deposit at the end of the term would be worth less than it was at the start of the term. Of course, this risk also applies to any savings or investment product that is not inflation-‐linked.
There are limits on how much you can claim under the FSCS
If the bank or building society holding your structured deposit were to go bankrupt and fail to fulfil its legal obligation to return your deposit in full, you may be entitled to claim under the FSCS, as explained earlier. However, there are limits on how much you can claim. For deposits, this is £85,000 per person, which covers all deposits (cash and structured) that you hold with that firm and with that firm’s group as a whole. So if you already hold £85,000 savings with a bank or building society, and then buy a structured deposit with the same bank or building society, or a bank or building society within the same group, you would only be able to claim £85,000 in total should it go bankrupt.
Main Advantages
• Potentially higher returns than can be achieved with standard cash deposit accounts
• Can be available as a cash ISA • May be covered by the FSCS
Main Things to Think About • You must be prepared to tie up
your money for the full term • Inflation is a risk • You cannot add to your deposit
during the term (although you can open a new one)
• There may be a risk that you receive no return
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Consumer checklist
Counterparty
Where is your money going to be held? Are you confident about the ability of your chosen bank or building society to return your deposit in full? Check whether you would be protected by the FSCS if the deposit taker goes bankrupt.
Before deciding to put money in a structured deposit, check that you have CLEAR answers to the following questions about the risks and how the product works.
Length
How long is the structured deposit term? Are you happy that your money will be tied up for this period, which may be several years? Do you have enough for other needs and emergencies during the term?
Exposure
What is the structured deposit exposed, or linked, to? This may be a stock market index, such as the FTSE 100, the rate of inflation or some other variable. Are you happy that your returns will be connected to something else in this way?
Access
What happens if you need to get access to your money before the end of the structured deposit term> Will you get your full deposit back, or could you lose some or it and if so, how much? Check the specific terms of any product you are considering.
Returns
Do you understand how your returns or interest will be calculated? A structured deposit should always specify this, based on the performance of the variable it is linked to. What is the minimum amount you could receive at the end of the term?
Structured deposits can be rewarding for people who understand and use them correctly within their overall portfolios. If you are in any doubt, a financial adviser should be able to talk you through your specific circumstances to make sure they are right for you.
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TISA is a not-‐for-‐profit membership association working with the UK retail
financial services industry, government and regulators to review,
develop and implement effective policies, regulations, products, advice
and services thereby encouraging individuals to have the appropriate savings and investments to support them, and their families, throughout
their lives.
The UK Structured Products Association (UKSPA) was established by the leading providers of structured
solutions to UK retail customers to provide a source of information and
education on structured products and deposits.