Beware the structured product scam
Q: I have £16,000 to put into a long-term savings account. Nationwide has advised me to put it in a six-year protected equity bond paying a minimum 8% gross return, up to a maximum return of 50% of my original investment, provided I make no withdrawals. I'm not sure what to do - could you advise me?
A: Nick McBreen is an independent financial adviser at Worldwide Financial Planning, Cornwall
The first thing that strikes me about your question is that you appear to believe you will put £16,000 into a long-term savings account, but the reality is that you will be investing it.
A protected equity bond is another name for protected investment and it's a type of structured product – an investor puts £X capital into the plan with the understanding that under the terms and conditions of the offer they will be certain to get back a pre-agreed percentage of their original investment.
There are a number of problems inherent with these – and with all structured products.
Firstly, your capital is locked up for the term of the contract, no withdrawals are permitted, so you have to be absolutely confident you will not need access to your money before the end of the six-year period.
Secondly, you're effectively taking a chance that your capital will make better returns than it would in a straightforward savings account – where you would still have access to and control over your money.
Inflation may become more of a factor over the next six years and the ultimate return on the structured investment could be eroded in real terms.
And another potential risk is that if Nationwide or other banks associated with the plan were to default you could lose all or part of your capital.
Investing into a structured product effectively excludes you from benefiting from any stockmarket dividends over the next six years, and from an equity investment point of view, this could be a very costly mistake.
Along with other bank and building society providers, Nationwide continues marketing its structured products to existing and potential new customers, but the returns from the Nationwide bond you are considering are paid net of basic-rate tax.
For a higher-rate taxpayer there will be a further liability, so is this the most tax-effective option for investing or saving your £16,000?
I suggest that you first work out how much of your total capital this £16,000 represents and ensure you have an emergency fund in place.
You should also maximise your individual savings account allowance of £10,200 for the current tax year. But once you've done so, there are still other places to put your £16,000. See an independent financial adviser for details.
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.