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Deposit That!

Stephanie McClarence, - 24/06/2015

One of the first savings accounts that many of us opened on our own would have been a deposit based account with a high street bank or building society. Having probably had a current account and/or an instant access ISA or equivalent with the same organisation, you may have been confident in the services offered by your existing bank or building society. These institutions are considered by the majority as one of the “safest” places to hold your money.

For some people, this may well be as far as their saving experience goes. The bank or building society is a well-known high street name; it has a reputation as a safe place to deposit or invest your money and in the unlikely event of a default of the deposit taker, there’s the safety net of the Financial Services Compensation Scheme (FSCS) for compensation. UK eligible claimants have a right to claim up to £85,000 per individual per institution in such circumstances.

The development of various online comparison sites allows savers to access the entire market from their sofa, enabling them to find the best possible deal without needing to put shoes on. Low interest rates which do not look set to change anytime soon are another reason behind the proliferation of these sites which aim to help savers make more informed purchase decisions. So why look anywhere else for your deposits?

For someone looking for a deposit product, let’s create some hypothetical parameters-

1. You’d like to beat the cash rate

2. You welcome the FSCS cover (just in case anything goes wrong)

3. You’re looking to invest for around 5 to 6 years

Following these criteria, if we were to visit a large comparison website, such as, the best rate offered is from Secure Trust Bank at 3.01% for a fixed rate 5 year bond. With this product, all of the interest is paid to a separate bank account. So, let’s introduce some figures, if you invested £10,000 into this bond and held it for the full 5 year term, gross interest payments of £301 would be paid each year or £1,505 over the life of the product, equating to 15.05% of the original deposit.

Whilst the above return would be improved upon if the interest generated each year could be reinvested, thereby earning further interest on itself at 3.01%, the rate is attractive enough to compensate for the lack of compounding.

An alternative account from a better known name that offers the opportunity to reinvest the interest is Virgin Money’s offering which pays 2.15% gross per year, which over a five year period would result in gross interest equivalent to 11.22% of the original investment.

Are these returns attractive enough? Looking further afield can help savers get potentially better returns with the same FSCS protection available.

So far we’ve considered deposits available within retail banking, but structured deposits can boost returns for savers in return for the risk of achieving no interest at all. For some, the word “structured” before “deposit” suddenly makes the product potentially complex through being unknown, but in reality, it shouldn’t. Structured deposits differ from traditional deposits in that a condition is added for returns. While products need to be evaluated on their individual terms, if you believe stock markets will rise over the course of your investment then why not consider them as part of your deposit portfolio? Simply put, the additional market risk of structured deposits relates to the potential interest only. If the markets fall, your original capital is protected.

A structured deposit currently available on is the Investec FTSE 100 6 Year Deposit Plan 3. This product has a slightly longer term than that of the fixed rate bonds mentioned, at 6 years, but for savers willing to lock away their money for better returns, this is a worthy option to consider. Returns from structured deposits are linked to the gain in the underlying measurement, in this case the FTSE 100.

The Investec deposit offers the potential for an interest payment of 35.95% if the FTSE 100 Index is above its initial index level at maturity, subject to averaging over the final six months. Providing the bank has remained solvent, at the end of the six year term there are two potential outcomes two things can happen...

1. The FTSE 100 (subject to six month averaging) is at a level equal to or lower than it was at the start of the plan – in which case there will be no interest payment, but the original capital will be returned in full.

2. The FTSE 100 (subject to six month averaging) is at a level higher than it was at the start of the plan – in these circumstances an interest payment of 35.95% (5.25% annualised return) will be paid. Taking that £10,000 mentioned earlier, this would result in interest of £3,595.

Still not convinced? Ok, let’s explain some long-term performance figures of structured deposits.

Whilst past performance is not a guide to the future, since the turn of the decade, there has been 348 FTSE 100 linked structured deposit maturities, several of which were launched just before the financial crisis. 81.32% of these plans matured with a gain with the remaining 18.68% returning capital only. The average total return on all structured deposits over this period was 16.25%, equivalent to a 4.05% annualised return, at a time when the Bank of England base rate had fallen to 0.5% and stayed there and cash deposits struggled to do much better.

Considering more recent performance, looking over the year to 1st June 2015, there have been 104 FTSE linked structured deposit maturities, with each and every one of them maturing with a gain. Over this period the average total return was 27.13%, equivalent to an annualised return of 5.58%.

While unfamiliarity with a particular product type may make you wary of investing in it, understanding of what a product has to offer, the worst case scenario and protection offered provides a good basis for an investment decision. If you have any concerns about whether a particular course of action is suitable for you, then please consult an Independent Financial Adviser.

No one can predict exactly what the available rates or returns will be on any type of investment in the next 6 months, year, or years to come. If you’re looking for a deposit based investment solution and are able to take that little bit of additional risk by risking the interest otherwise available from a fixed term bond, structured deposits may be one answer to beating your bank’s rates offered on deposits.

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