What is a structured deposit product?

What is a structured deposit?

A structured deposit is a cross between a fixed rate bond and an investment. It has a set term like a fixed term deposit account, but instead of paying a fixed rate of interest, it instead offers returns that are conditional on the performance of a stock market index (such as the FTSE 100).

This means structured deposits can offer the potential for higher returns, but there’s no guarantee – if the chosen index has fallen by the time your product matures, you won’t receive any interest at all.

That said, they can offer the chance for stock market investment without the capital risk – even if the indices performs poorly, or falls below the level when your investment began, you’ll still get your initial deposit back in full.

This is unlike many other investment products, where your capital as well as your returns are at risk should the market fall.

How do structured deposits work?

Structured deposits work in a similar way to fixed savings accounts, in that they have a fixed term and the deposit is held with a bank. When you open the product you’ll be expected to commit a lump sum of money for a certain length of time – typically a minimum of two years, but ideally five years or more – and won’t be able to add more or access your funds until maturity (you may be able to withdraw your money early if you need, but in this case you may get back less than you put in).

However, unlike fixed bonds, structured deposits sacrifice guaranteed interest payments for potentially higher returns that are based on stock market performance. This means you may receive a higher interest rate than you would get from a fixed rate bond, but there is a risk you’ll get no interest at all. However, you should still receive your initial deposit back, even if the stock market has fallen.

Note that there are different types of structured deposits available. Some will only pay interest if the index rises, whereas some “defensive” structured deposits offer a lower interest rate which can still be paid if the index hasn’t performed, provided it doesn’t fall by more than a certain amount.

Different types of structured deposit product will base their returns on the performance of different indices, too. This could be an equity index (such as the FTSE 100), certain bonds or even a single share, or in some cases they’ll be linked to a floating interest rate (such as base rate). Make sure to speak to your provider so you know exactly what you’re investing in, and you’ll likely want to speak to an independent adviser as well.

What can be invested into a structured deposit?

Each product will have its own specific rules, but in general these accounts will accept

• Direct investments
• Cash ISA funds for the current tax year
• ISA transfers
• SIPP/SSAS pension arrangements
• Trustee, corporate, charity, offshore bond and nominee investments
• Investment on behalf of a child

Are my returns taxable?

Any returns you receive from structured deposits will be taxable at your usual income tax rate (find out more in our guide on how savings are taxed).

The exception to this is if you’re investing in an ISA wrapper, in which case any returns – as is the case with all ISAs – will be tax-free.

What are the risks of structured deposits?

One of the biggest risks of a structured deposit is that of receiving no interest if the stock market index does not perform in a certain way, for example if it hasn’t risen over the term or if it has fallen by more than a specified amount.

There’s also the risk of being unable to access your money in an emergency, with structured deposits designed to be held for the full term. Savers may be able to access their funds before the agreed maturity date, however if they do this the amount that they get back will depend on the market value of the structured deposit at that time, which could be more or less than the amount they invested.

And, as is the case with all savings accounts, if the deposit taker becomes insolvent during the term of the structured deposit, savers risk losing their money. However, they’d still be able to seek compensation from the Financial Services Compensation Scheme (FSCS), subject to their eligibility as a claimant.

Are structured deposits safe?

Unlike pure investment products, structured deposits are cash-based accounts held with a banking provider.

This means that your capital is protected, subject to your eligibility under the Financial Services Compensation Scheme. As such, in the event that the deposit-taker is unable to meet its obligations, structured deposits qualify for FSCS protection of up to £85,000 per person in the same way as your bank or building society account does.

Is a structured deposit right for me?

Structured deposits are generally designed for investors that aren’t satisfied with the interest rates offered by fixed term deposits, and instead want the potential for higher returns. They are willing to take the risk that they may receive no interest, in return for the potential to achieve a higher rate of interest if the index performs in a certain way.

As such, these products may be right for you if you’re comfortable with this level of risk.

You’ll also need to be able to afford to lock away a lump sum of money for a set length of time, with enough held in accessible savings elsewhere should an emergency hit. They could also be ideal if you want to test the waters of stock market investing, without exposing your capital to the full risks involved.

On the flipside, a structured deposit likely won’t be right for you if you want guaranteed returns, if you don’t have a lump sum available, or you might need to access the funds before maturity. Likewise, if you want to make regular deposits and/or secure a regular income from your savings, you’re probably best to look elsewhere.

Ultimately, it’s important to consider whether you want the lower but guaranteed interest rate of a fixed bond, or potentially a higher conditional interest rate of a structured deposit. This decision will be highly dependent on your personal circumstances and savings goals, and it won’t always be easy to decide.

This is why it’s advisable to speak to an adviser beforehand, and if you’re not confident with this kind of product, check out the best savings accounts as an alternative.

Where can you get a structured deposit product?

If you are considering a structured deposit, you can either invest via a financial adviser or apply online through a brokerage website.

A financial adviser may charge you a fee for their services, but they can help ensure that this type of investment is right for you, by giving you advice on the decision to invest. They are also responsible for making sure you understand the risks of investing in this type of product.

If you choose to go online, you will be making the decision to invest on your own. This means you will not receive any guidance or advice on if a structured deposit is right for you.