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Stock market saving rates without the risk – what’s the catch?

Money on chess board

If you’re disappointed with bank savings rates but wary of investing in an unpredictable stock market, would you be tempted by a product that offers the best of both worlds? That’s the idea behind structured deposits.

‘Structured deposits’ are often known as stock market-linked savings or capital protected bonds. If the stock market rises while your money’s invested, you’ll reap some or all of the benefit. If stock markets fall, you won’t lose the investment you started with. Sound too good to be true? That’s because, in many cases, it is.

So what are structured deposits? Well, rather than offering a set interest rate on your money, structured deposits pay you a rate of return that’s tied to the increase in a particular stock market, such as the FTSE 100, over a set period.

However, we think structured deposits deliberately blur the lines between saving and investing, often giving customers the impression that they’re likely to do better than they actually are.

Too good to be true?

Most structured deposits advertise a particular maximum return, say of 40% growth over six years (equivalent to around 6% a year). But this has two downsides – if the stock market does really well, the amount you earn will be capped so you won’t enjoy the full benefit. On the other hand, just because a provider advertises a maximum return of 6% a year, that doesn’t mean you’ll necessarily ever get that rate.

It’s like providers dangle a carrot you might never reach. And although many of these schemes have minimum returns, others simply pay your money back and not a penny more.

We looked at a range of recently marketed FTSE 100-linked savings products, to see how they would have performed if they’d been available over the past five and 10 years. One Santander account wouldn’t have paid out the maximum advertised return on a single occasion in the past decade, and would have just paid out the minimum return in the majority of cases.

We found a similar story with Legal & General and Cater Allen. The L&G product wouldn’t have paid out the maximum return at all over the past 10 years, while Cater Allen’s would have achieved this in only 1% of cases.

The downsides of structured deposits

None of the products we looked at produced an average annual return above what you could have earned in a fixed-rate savings account over the same period.

Structured deposits have crept into the mainstream over the past few years, with banks and building societies presenting them as a mass-market alternative to savings accounts. This positioning is completely wrong, and we think it’s time these products were brought under the same regulations as other investments and sold with regulated financial advice.

Have you taken out or been offered a stock market-linked deposit? Were the potential downsides explained properly to you?

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