With the Bank of England base rate still at 0.5%, savings rates also look set to stay low. Could structured deposits be a viable alternative?
Structured deposits offer potentially higher returns, but they also have more variable features to understand. There is no guarantee that you will receive the potential return, and you may only get back your original deposit at the end of the term.
Structured deposits in a nutshell…
Structured deposits are similar to other types of fixed term savings deposit accounts, such as fixed rate bonds or cash ISAs, but there are some important differences:
- They have variable returns based on the performance of an underlying asset: for example, market indices like the FTSE 100, equities, banking interest rates, foreign exchange rates, or a combination of these
- While they're designed to pay back at least your original deposit at maturity, they are linked to the performance of investments, so returns are not guaranteed. This means that there's the potential for your money to earn more than conventional savings rates, but you may also get little or no return above your original deposit
- Structured deposits usually require a fixed term of between three and six years. If you withdraw early there's a chance you'll lose a substantial amount from your deposit, so they're suitable if you're sure you won't need access to your money within that timeframe
For more details, read our quick guide to structured deposits.
What to look for
There are plenty of structured deposit providers on the market, but keep an eye on whether or not they're FSCS protected. Under FSCS protection, your savings are kept safe up to a certain amount should the institution holding your deposit, known as the deposit taker, become insolvent.
Also, although structured deposits are designed to return your original capital, inflation may eat away at its real value over time.
Finding the right structured deposit for you
This is all about what you want to achieve with your money: a regular income, steady growth over time like a savings account, or a combination of the two? Different products will pay out any returns in different ways. Many also offer a Cash ISA option, protecting any returns from income tax, within ISA limits.
Here are some of the most common types of structured deposit:
- Income plans pay out any returns on a regular basis (usually either monthly, quarterly or annually), providing the underlying assets meet the targets set out for them.
- Growth plans pay out any returns typically at maturity, and are linked to the performance of the underlying assets. Potential returns may be capped.
- Kick-out plans mature early if the targets set for underlying assets are met.