Stock markets have fallen heavily this year, and despite a modest recovery, are still at their lowest levels for five years.
Many clients are seeing this as a good time to invest. Other clients are wary of risking their capital when so much uncertainty still exists and when the end of the Coronavirus pandemic remains very hard to predict.
If someone invested in the UK stock market (FTSE100) today and, if it were then to recover to the level we saw three months ago, that would represent an investment return of 30 per cent.
Many clients would be happy to achieve a return like that over five years, never mind over a few months and, although there are no guarantees, many commentators think that it is reasonable to believe that markets will recover much of the lost ground over the next 12 months or perhaps even more quickly than that.
The problem for investors is that many are keen to benefit from a potential upswing but worried about losing their capital if the markets fall further.
One option to allow investors to benefit from the potential for markets to recover without having to be concerned about risking their capital is a Structured Bank Deposit.
These are deposit accounts that pay the interest that is linked to stock-market levels. The capital is just as secure as any other bank deposit account, especially if it is backed by the FSCS (Government-backed) guarantee.
The FSCS guarantee ensures that, even if the bank providing the deposit account goes bust, the UK government will guarantee the return of up to £85,000 of the original capital invested. As long as investors invest no more than £85,000 with any one bank, their capital is 100 per cent safe.
However, unlike traditional deposit accounts, Structured Bank Deposits pay relatively high rates of interest provided that certain conditions are met. Even if the conditions aren’t met, the capital is not at risk.
The rate of interest is linked to stock market returns based and a predetermined formula. Because these formulas mean that interest rates are often at their highest when markets are volatile, there are some very attractive offers currently available including the following:
- Three Year deposit – 10.5 per cent interest over three years if the FTSE100 is up from the start date.
- Six Year deposit – 30 per cent interest over six years if the FTSE100 is up from its start date.
- Kick out deposit account – Pays 4.5 per cent per annum interest on maturity. Maturity occurs on the first anniversary after year three when the FTSE100 is up from its start date.
Structured Bank Deposits don’t pay interest if stock markets levels are lower at maturity than they were at the outset. That means that all investors are risking is the interest they might have earned.
Even if no interest is paid, the capital is guaranteed and will be repaid in full. Most traditional bank deposit accounts are paying interest rates of much less than 1 per cent so, even on a compound basis, there is very little difference between a traditional cash deposit on the one hand and a Structured Bank Deposit that failed to pay any interest on the other.
By contrast, if the Structured Bank Deposit pays out (as the vast majority have done over recent years) they give the prospect of double-digit returns.
In summary, if you have the capital to invest for a fixed term of three to six years and want a high rate of interest without risking your capital then please contact us for further advice.
Please note – this article is for general information; you must seek specific advice regarding your individual circumstances when it comes to investing.