Cash ISA returns fell after the credit crunch, and at time of writing this you'll do well to find many which return over 3% annually.
So is there a way to make your savings work harder without risking your hard-earned capital during these economically unstable times?
Read on to find out.
The basics explained.
Since the introduction of Individual Savings Accounts (ISA) in the UK in 1999, there have been, broadly speaking, two types: Cash ISAs and Stocks & Shares ISAs.
Cash ISAs are similar to a bank account, apart from the tax treatment. Interest is not subject to income tax nor capital gains tax. Your deposit is as safe as if you had deposited it in an ordinary savings account and the returns are known, at least for the current tax year.
Stocks & Shares ISAs are an investment rather than a deposit. Again, your returns have a different tax treatment than outside of an ISA, but as with other investments, your capital is at risk. So you could end up with less than you invested. However, and this is the main attraction of investments, you could end up with far more than a Cash ISA would have returned. Therefore, they are really only suitable for those who understand and are happy with these risks.
Structured deposits
So, if you aren't happy to risk your capital by investing in a Stocks & Shares ISA and you aren't happy with with the relatively low (compared to years leading up to 2009) interest rate of Cash ISAs, where is the best place to deposit your savings?
What if you were offered the security of a bank deposit account whilst also having limited exposure to underlyings such as the FTSE100 and therefore potentially higher returns than a standard deposit account or Cash ISA? This is essentially a how a Structured Deposit works.
So, you could achieve returns of 6% per annum or more, and those returns are tax free. Sound too good to be true in this day and age? There are some restrictions of course, and an element of low risk.
The risk is that you may receive back only your original deposit at the end of term. Terms usually last 3, 5 or 6 years (although some schemes have paid out, or 'kicked-out' after just 1 year), so you need to be prepared to not make any withdrawals for a number of years. So, for example, if I transferred £10,000 today into a 5-year term structured deposit, I might receive only £10,000 back in 2018 - that is the worst case scenario (assuming our banks don't go the way Cyprus's have recently). If I left that sum in my bank's Cash ISA, it would have grown to £10,050 in 2018 based on the bank's current published rates. So I'm effectively risking £50 to try and get a better return.
So what are those better returns?
Each structured product provider offers different ways of indirectly exposing your money to the markets. These offers usually only have a window of a matter of weeks before they are replaced with different terms. For example, one may be designed to return 100% of any increase in the FTSE100 over a 5 year term e.g. if the FTSE has risen by 40% over 5 years, your balance will have grown by 40%. If the FTSE has fallen by 30%, you will have lost 30%..... except you won't of course! Because you are guaranteed to receive at least your original deposit back. Even though the FTSE may be 30% below its level when you deposited your money, you don't lose any of your deposit.
To summarise, a structured deposit is deposit based and offers a defined return linked to one or more underlyings, such as the FTSE 100. Structured Deposits are designed to return at least the initial deposit by the end of the product life with any additional return linked to the movement of the underlying. Structured deposits can be held within a variety of tax wrappers such as a Cash ISA.
Where can I find out more about structured deposits?
If you are fed up with low savings and Cash ISA rates, or are just interested in finding out more about these products, have a word with your financial adviser, who should be able to help you find out if structured deposits might be the right place for some of your savings.
