Never Lose a Penny How a Structured Product Works

Introduction A Structured Product is one which is exactly that; a product that is structured by adding a number of elements together. This presentation explains how they are constructed in layman’s terms. Imagine: Taking some of your capital and investing it for a specific term Then work backwards to calculate how much of that capital you would have to put into a deposit account to provide you with the original amount at the end of the selected investment term. The amount left over from this calculation is the amount you could use to provide you with an ‘upside’ to your money. The following pages illustrate how this concept works.

Introduction A Structured Product is one which is exactly that; a product that is structured by adding a number of elements together. This presentation explains how they are constructed in layman’s terms. Imagine: Taking some of your capital and investing it for a specific term Then work backwards to calculate how much of that capital you would have to put into a deposit account to provide you with the original amount at the end of the selected investment term. The amount left over from this calculation is the amount you could use to provide you with an ‘upside’ to your money. The following pages illustrate how this concept works.

Providing Your Capital Return If you have £10,000, the term you choose to replace your capital over is critical in providing you with the best returns possible for your money. The table below illustrates the amounts you would get back if you invested your money for a 5% per annum, compound return, over the terms specified. This means, if you want to return your capital after 1 year, you would have to invest £9,524 on deposit, and obtain a 5% return to give £10,000 back at the end of the 1 year. However, if you select a 5 year term, you only need to invest £7,835 to return your capital at the end of the term.

Providing Your Capital Return These figures are illustrated as follows: This is how the return of the original capital invested is provided within a Structured Product. In these 2 examples, the terms selected mean that there is £476 in the 1 year option and £2,165 in the 5 year option, to invest to provide a better return on your money. £9,524 Invested £10,000 Returned £10,000 Returned £7,835 Invested 1 Year Investment 5 Year Investment

Providing Growth on Your Capital Following these examples through, we now have 2 scenarios: £476 to use for 1 year to provide growth on the investment. or £2,165 to use for 5 years to provide growth on the investment. It is quite easy to understand that you are more likely to get a better return on £2,165 invested over 5 years than you are £476 invested for 1 year. This illustrates the impact of the term on the potential returns from a Structured Product in that, the longer the term, the better the potential return.

Providing Growth on Your Capital The product provider now has to use this money to provide the required growth and it is typically used to purchase a ‘Note’, which is: an agreement, over a specific term, for an agreed return based upon a particular index, such as the FTSE. The return may well be ‘factored’ on the growth side, but also, limited on the upside such as: 3 x the growth on the FTSE, to a maximum return of 45%. £10,000 invested could therefore produce a maximum return of £14,500 over the term of the contract, however, the FTSE would also only have to rise by 10% to produce a 30% return.

Providing Protection on Your Capital We have already seen how some of the capital is used to: Provide the return of capital on your money Pay the plan charges Provide the upside return. The first of these 3 points provides some assurance that should the deposit taker remain in operation, your ‘minimum’ return is your original money. But what happens if the deposit-taker, otherwise known as the counter-party for CGT Based Schemes, goes into administration: The Financial Services Compensation Scheme guarantees to protect 100% of the ‘retail’ investor’s capital if the deposit-taker, or the counter-party goes into administration. The difference between Deposit Based Schemes and CGT Based Schemes is therefore the difference between who is classed as the ‘retail investor’?

Providing Protection on Your Capital So, as already clarified, the level of protection offered by the Financial Services Compensation Scheme is provided to the ‘retail investor’. Deposit Based Schemes: The retail investor for these Schemes, is YOU, the customer. CGT Based Schemes: The retail investor for these Schemes is the plan manager. This means that the plan manager, who may well invest over £10,000,000, on behalf of many customers, only has £50,000 worth of compensation to share between them – after costs. This situation is known as the ‘counterparty risk’. If this counterparty goes into administration, the capital is at risk. For this reason, it is essential to understand the risks and the returns available from whichever structured product you choose but the basic deal is a lower return for greater security is offered by the deposit based Schemes, and vice versa for the CGT Schemes.

Never Lose a Penny Never Lose a Penny is committed to making this decision as easy as possible for you. We have dedicated information relating to both types of structured product. Use our forum, or contact us direct if you require any other information. However, please understand, we are not authorised to advise you on the suitability of regulated products. Where advice is required, we have a network of dedicated professionals to help. This means we may well have to refer you on to one of these professionals if your query results in the need for advice. We hope that you understand this and we wish you well in your search.