If you are a saver looking for a good rate of interest on a fixed rate then you are in for a shock.

Since the launch of the Government Funding Lending Scheme in August this year which provides cheap money to Banks, there has been no incentive for banks to offer attractive interest rates to encourage you to save with them. Interest rates on fixed rate bonds have been particularly hit with rates on 1 to 5 year terms falling significantly in the last few months.

Impact of inflation on fixed interest returns

With consumer price inflation running at 2.70% as at end of October 2012 most tax payers will do well to find a home for their money which keeps its value in real terms. A snapshot of some of the leading providers of fixed rate bonds shows how rates have dropped over 1,2,3 and 5 years since July 2012.

*Source: Moneyfacts (Annual Interest based on a £5,000 balance).

Alternative options to fixed rate bonds

In looking for viable capital protected alternatives to traditional fixed rate bonds structured deposit plans are worth a closer look.

What is a structured deposit plan?

A structured deposit plan is a fixed term investment with a payout that is linked to the performance of an underlying asset e.g. FTSE 100

Structured deposit plans are appropriate for people who have a low appetite for risk but are willing to accept a return on the deposit that involves limited exposure to the stock market. While returns are not normally guaranteed in structured deposit plans they offer the potential for competitive rates of return over fixed term bonds. When interest rates are low they can offer investors relatively low risk exposure to market performance.

In a deposit plan money is held with a deposit taker such as a high street bank. Capital is at risk if the deposit taker is unable to meet its liabilities and repay investors. As with a savings account in the event of default of the deposit taker you have recourse to the Financial Services Compensation Scheme (FSCS) which currently covers an individual up to £85,000 per authorised institution.

What plans are currently available?

3 to 4 year term plans

Investec’s 3 Year Deposit Plan offers a fixed return of 13.5% if the value of the FTSE at the end of the term is higher than its starting value, subject to averaging. This equates to around 4.31% compound and compared to our current leading 3 year fixed rate, offers the potential for a 1.36% annual premium.

Cater Allen offer a 3¾ year Growth Plan which will return 100% of any rise in the FTSE 100 over the term, capped at 26% (gross). Depending on your view of the FTSE this also offers the opportunity to provide a higher return than would be available through current fixed rates of similar duration.

Early maturity plans

The ability to mature early is a feature which is unique to structured products. Investec’s Kick Out Deposit Plan offers a potential 4.50% per annum (not compounded) with the opportunity to mature early provided the value of the FTSE 100 at the end of each year (from year 2 onwards) is higher than its value at the start of the plan.

This means a return of 9% could be yours after just 2 years and even if the plan runs for the full 5 years and then kicks out, this deposit offers the potential for more than a 1% premium on longer term fixed rates.

Income plans

If you require income , Societe Generale’s UK Range 7 Plan 6 offers the opportunity for an attractive 7% (gross) for each year the FTSE stays between an upper and lower range based on its level at the start of the plan. This range increases each year, starting at +/- 15% in year 1, and then increasing by +/- 5% thereby providing a wider range each year within which the FTSE can move. If it moves outside the range, the income is not paid for that year. The plan has a 6 year term.

Please note

Since the returns are not guaranteed these savings plan alternatives are not designed to meet the entire needs of every saver. However, what they do is provide a defined return over a defined term compared to other options currently available.

As with any savings product, there is always a trade off for receiving a higher rate of return and with structured deposits, this is made absolutely clear at the outset. The two main downsides are that the deposit taker may go into liquidation (as with any deposit) and that the payout mechanism within the plan does not occur so you only receive your capital back.

This has to be balanced and compared to the upside which is inevitably a greater return than could be achieved by putting you money away for the same length of time with a similarly rated credit institution.

For a range of current structured deposit plans see the table below.