This leaves £2,162 for the charges, and to provide the 'upside' return of the product.
£500 might be used for charges with £1,662 used to purchase a 'note' from another financial institution prepared to offer for example:
3 x Rise in the FTSE subject to 45% maximum return
| Never Lose Your Savings and Investments |
Guaranteed Investment ProductsThe term ‘guarantee’ is one, which sometimes needs to be viewed with caution. A guarantee can be offered to either: • Guarantee the return of your capital no matter WHAT happens. or • Guarantee the return of your capital IF something else happens. A common ‘if something else’, is typically:o If the stock market does not fall by 50% or more. Meaning, that if it does, your capital is at risk. Therefore, understanding ‘exactly’ in what you are investing, is of paramount importance! The Structured Product is fast becoming the most popular kind of investment that offers a fantastic opportunity to make an investment based upon a particular asset, without actually having to invest directly into said investment. For example, in recent years a FTSE Index Tracker Fund has been a popular investment because it invests in the Top 100 companies listed upon the London Stock Exchange. However, this investment can still fluctuate in value and even result in a loss of capital if the stock market has actually fallen in value at the time of encashment. A structured product will actually allow you to participate in the performance of the FTSE without actually investing directly into it by giving terms as follows: 100% capital guarantee + 3 x the rise in the FTSE subject to a maximum return of 45% Fundamentally, there are 2 different types of structured products: o Deposit Based: o Capital Gains Tax Based Neverloseapenny believe that, with any form of financial planning, irrespective of the type of investment, it is essential to first and foremost, maximise your investments on those products that offer: o Maximum security and before looking for extra growth and excitement. By ‘maximum security’, we mean products that offer a positive return on your capital PLUS a 100% guarantee of the return of your capital if the product provider goes into liquidation (i.e. goes bust). The 100% return of capital guarantee is provided by the protection of the Financial Services Compensation Scheme (FSCS). With this kind of peace of mind, it is possible to investigate products that offer better returns than those normally associated with typical bank and building society accounts. However, these accounts are still very important when it comes to organising your finances. But even with these accounts, it is important to understand the risks your money faces. The following products therefore offer the opportunity to Maximise the level of Security on your investment: o Savings and Deposit Accounts o National Savings o Guaranteed Income and Growth Bonds o Deposit Based Structured Products: The second important aspect of your savings and investments to maximise, is the tax efficiency offered by the contracts. This can only be offered managing the following characteristics of your money: o Maximise your ISA allowances. How Do Structured Products Work?A structured product is one which, is ‘structured’ by a product provider to offer returns that should be either: o Better than those returns offered by typical bank and building society accounts. o Offer lower risk by tracking particular asset class returns (e.g. the Stock Market in the UK – FTSE, the Stock Market in the US – Dow Jones, or any other index chosen by the product provider). Structured Products are grouped by whether they are: o Deposit Based Or o Capital Gains Taxed Based. Deposit Based structured products are products which: o Offer a ‘guaranteed’ return of capital, as a minimum, at maturity. o Offer a positive return based upon the performance of another index, such as FTSE, Dow Jones etc. o Are taxed as income in the same way that savings and deposit accounts. Offer the full protection of the Financial Services Compensation Scheme. o Are written for a specified term. Capital Gains Taxed structured products are products which: o ‘Protect’ the value of the capital at maturity. This means that an amount that is less than the original investment could be returned if the index against which it is begin measured fails to achieve specified criteria. o Offer a positive return based upon the performance of another index, such as FTSE, Dow Jones etc. o Are taxed for capital gains in the same way as OEICs and Unit Trusts. o Do not necessarily offer the full protection of the Financial Services Compensation Scheme. o Are written for a specified term. A Step-by-Step Guide to Structured Products:1. You give your money to a structured product provider for a specified term, say £10,000 for 5 years, for this example. 2. The product provider collects the money and the product is issued on a ‘strike date’ upon which the level of the associated index is measured, say, the FTSE at 5,120 points. 3. The product provider invests enough money into a deposit based contract that will return the value of the original capital at maturity, in this example £7,838: £2,162
£7,838 invested with a 5% pa return to provide minimum maturity value
5 Years
£10,000 minimum maturity value
4. The additional capital, £2,162, is used to pay the charges and to purchase a ‘Note’ to deliver the positive upside expected from the contract. 5. The ‘Note’ will determine what the overall return will be at maturity. In the example above this is: • 3 x Rise in the FTSE subject to a 45% maximum return. 6. Be particularly careful with CGT based structured products because the terms of the ‘Note’ will often include a ‘downside, such as: • Your capital is protected unless the FTSE falls by 50% at any time throughout the term of the contract, in which case your capital at maturity will be reduced by the amount of the fall in the FTSE at maturity. Key Points to remember! • Deposit Based Schemes offer the full protection of the Financial Services Compensation Scheme. Savings and Deposit Accounts:o These accounts are offered by banking and building society organisations and were traditionally used to help the organisation raise the necessary funds to offer lending in the form of personal loans and mortgages. The interest offered on these accounts therefore followed the base rates offered by the Bank of England because these determine the rates of borrowing. o Risks associated with these accounts are 2 fold: 1. Sometimes, the provider of these accounts makes them dormant, and the interest rates are lowered to reflect the fact that they are no longer offered by the organisation. 2. The longer term affects of inflation can erode the value of your money if the rate of inflation exceeds the rate of interest over the longer term. National Savings:o These are products offered by the Government and have therefore, historically been considered to one of the safest investments available. However, recent events in the financial markets resulting in some ‘countries’ effectively going bust (Iceland, with potentially Greece and some other European countries following suit), even these investments need to be approached with some caution. o The products come in different forms with some being targeted for the benefit of children, some for adults and some for pensioners. Guaranteed Income and Growth Bondso These products are also offered by banks and building societies, but can also be offered by insurance companies and other financial institutions. o You need to make sure that the guarantee is offered as a return of capital, or a return of growth or income on capital, and NOT as a ‘guarantee in the event of something else happening’ e.g. a guarantee of 50% return IF the stock market rises by 80% during the term of the product. o Never Lose a Penny’s customer promise is that we will make these differences clear on the products offered through this site. Deposit Based Structured Products:o These products can be difficult to understand, which is why it is very important that the time is taken to do exactly that! o These products are exactly like the name suggest – they are structured. o You give your money to the product holder for a specific term of anywhere between 1 and 7 years, but can even be as long as 10 years. o An amount of your money is invested on deposit to return the capital, as a minimum, at the end of the specified term. o The residual is used to pay the charges on the contract and to purchase a ‘note’ that provides the positive upside to the investment. o Deposit based schemes, up to a limit of £50,000 are fully protected under the Financial Services Compensation Scheme. |
