Sutch wrote:I've been invited to consider a structured investment plan, about which I know nothing.
I must say I'm quite amused by some of the comments in this thread
. There's always been an ethos on TMF/TLF to dismiss any financial "products" out of hand on an if it's good for them to sell it must be bad for you basis. Of
course, one should always look into any financial instrument with a critical eye, and let's go straight to one of the things you should look into first; risk.
The structured products space is split into two basic kinds, structured
deposits and structured
investments. The latter are more formally known as Structured Capital At Risk Products (SCARPs) and a lot of the "bargepole" type comments in the thread are I suspect thinking of those, and perhaps not aware of the differences.
However, what you are looking at is, as you say in the title, a structured
deposit product and these (as you also say in the title) come with FSCS protection. It is
not a SCARP and most definitely not a "precipice bond" -- indeed the article at
the link previously posted about structured products explains the difference and says:
The safest type are known as “structured deposits” which aim to return your money whatever happens to markets.
Your capital is protected by the Government backed Financial Services Compensation Scheme (FSCS), which guarantees the first £75,000 if a company goes bust.
(Old article, it's now £85K). And, as the Money Advice Service says:
https://www.moneyadviceservice.org.uk/e ... t-productsDon’t get caught out!
If you’re looking for a structured deposit it’s very important that you don’t take out a structured investment by mistake. Structured investments offer you far less protection than a structured deposit.
So, as it's a structured
deposit and, hence, covered by the FSCS (subject to the normal rules of up to £85K total deposits in the institution) there effectively isn't any end credit or default risk. So, what you need to look at next is potential returns and what's called investment risk, i.e. how it's likely to perform.
When I saw your OP I immediately thought it sounded like an Investec autocall (aka "kick-out") product, and on checking, yep (unless your IFA has found another identical), I think it's this one:
FTSE 100 Defensive Kick-Out Deposit Plan 9 --
note: when you follow the link you have to tell it you are an IFA to see the pages
BTW, the terminology is common across the structured products industry. "Autocall"/"Kick-out" means it's a product offering a (usually) fixed per annum rate of return and may mature ("call") before the full period, "Defensive" means the trigger level for the call declines over the life of the product, "Deposit" means it's a capital protected FSCS covered product, and the index is the one the product uses the levels of.
Anyway, I thought it was an Investec product for two reasons, firstly 'cos it's a structured deposit and since Barclays and NS&I stopped their regular similar offerings there haven't been many others offering structured
deposits, and secondly 'cos it's a pretty conservative product and Investec always were. They've been in the space for a long time and their products have always been a bit on the "yawn" side.
So, the investment risk is, quite simply, that you'll not get any return over the six years. For the lost opportunity that presents you can make all sorts of guesstimates at, depending on what else you might do with the money instead, but a reasonable way of looking at it (given the FSCS cover) would be to base it on the best long term deposit rates you could get, which appear to be around 2.6%pa for a five year deposit at the moment. So for six years that'll come to a total of ~16.6%.
On the potential return side, remember this gives a flat 4.5%pa (not compound), so if it called in 3 years the 13.5% you'd get is an annualised 4.31%pa and if it called in 6 the 27% is an annualised 4.06%pa.
So that's basically it. It is a very low risk (FSCS covered) investment with the worst being that your money is tied up for 6 years for no return and the best being that you'll get an annualised 4.31%pa after 3 years, declining in further years' potential calls to an annualised 4.06%pa after 6. My view is: Yawn. (Esp. post RDR, see below*). However, I'm not you and only you can decide if the risk-reward profile here is to your liking or not. There are, of course, plenty of ways of
potentially getting higher returns but they also come with potentially higher losses.
The exception is Premium Bonds, and BTW, it's not really appropriate to compare this structured product with the FTSE 100. It doesn't invest in the FTSE 100, the index is just used to trigger the returns (or not). As Alaric says, it's really just a deposit with an odd way of determining the interest. Indeed, if you believe, as many do, that stock markets are not predictable then there's a fair argument to be made for the FTSE 100 involvement in this product being akin to Ernie; it's just a random number generator that may (or may not) trigger returns.
Oh, on tax, the return from structured
deposits (including this one) is always treated as interest and is taxed as such (unless in an ISA of course). However do remember that the return -- and hence the potential tax on it -- comes at the point of maturity: you won't be taxed on 4.5% each year, you'll be taxed on, e.g. 13.5% in one year, if it calls in year 3.
And as for if you can DIY the same, well, if you target say the 3 year return then you could for each £1000 you want to invest put £931 into a 3 year savings account at 2.4%, which is par at the moment and would get you back to £1000 after 3 years, and then you have the remaining £69 to try and turn into £135 after 3 years to at least match the Investec product's potential. (I'll leave targeting other periods as an exercise for the reader.
)
£69 to £135 would be a 95% return in three years. Possible, but unlikely with a simple FTSE 100 tracker. Of course, you could get a, say, 5x tracker, or go for options, or covered warrants. I'm sure it's doable but whether you want to do it is another matter. Hey, here's a thought ...
Tell your IFA you like the idea but instead of buying the Investec product you're going to put 93.1% into the Investec 3 year 2.4% savings account (yes, they do have such) and you'll use the other 6.9% to buy Investec shares (INVP) to try to make the 95% return on them, as you think they'll be a double-bagger over three years! Do it in person, rather than over the phone or email, so that you can see his face when you say it.
I'm inherently suspicious of 'get rich quick' schemes but happy to be educated
LOL. A (flat) 4.5%pa isn't exactly get rich quick, eh?
I said above the structured products space is split into two basic kinds,
deposits and
investments, but there is also an additional dimension which is
listed and
retail. Retail means ones you buy directly (and only) from the provider, almost always through an IFA nowadays, like the Investec one.
Listed means the product (and they are always SCARPs, capital-at-risk
investments) is an
exchange traded product (ETP), listed and traded on the London stock exchange, with a TIDM, and which you buy & sell on the secondary market using a stock broker (after making a "sophisticated investor" declaration). The advantage of these is that you can buy & sell at any time and you take a view on whether they're under or over priced in the market.
I traded listed SCARPs, mostly autocalls (kick-outs), for a few years, with results quite to my satisfaction, but haven't done so for a while for various reasons. However, I did also buy a couple of retail ones in the day, including one from Investec. That was structured investment, a capital-at-risk autocall, and at 11%pa was a bit ho-hum for a SCARP at the time (2009) -- but in those days IFAs received commissions and I used a flat fee discount IFA who rebated the 3.5% commission to me (Cavendish Online) lowering the cost and giving me an over 14% return when the autocall kicked out at the first anniversary. Happy days, and now a negative side to the end of commissions....
Oh gosh, this was long! I hadn't intended it to be, sorry if I've rambled in places....
