What is a structured deposit?

A traditional fixed rate deposit pays a fixed interest rate at the end of a pre-agreed period. A structured deposit works the same way except that the interest rate varies with the price of an asset. The asset may be a basket of equities, index, fund, currency, commodity or property market.

For example, a five year structured deposit might repay the holders capital plus 20% if the FTSE 100 is  higher at the end of the period. If the FTSE 100 is lower, only the deposit amount is repaid.

In common with traditional deposits, holders of structured deposits take the risk that the bank taking the deposit is unable to repay it. However, in certain cases, the structured deposit may be covered by a state deposit protection scheme for residents of that country.

Banks normally recommend that investors hold structured deposits until the maturity date to ensure they receive their money back. It may be possible to repay the structured deposit early. However, there may be a penalty fee for doing so which will reduce the amount of capital and interest repaid. Hence, the deposit holder’s capital may be at risk if the deposit is repaid early.

There is a different type of structured deposit where the owner puts capital at risk called Dual Currency Deposits. They tend to be regulated as investments as a result.

Structured deposits are generally taxed as income. However, investors should seek their own advice in respect of taxation etc.

In addition to the credit risk of the deposit taking bank and the market risk that the deposit  does not pay any interest, there are a number of other risks associated with structured deposits (see Risks of Structured Investing).

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