Cater Allen plan mirrors FTSE 100

What's the deal?

Cater Allen, the private banking arm of Santander, offers an investment product that pays out a return equal to the growth of the FTSE 100 equity index over six years.

If the index falls, investors get back the original sum they invested.

In the sixth year, the Cater Allen Growth Plan 12 will try to smooth returns by picking the average index level at the end of each month until maturity on May 1 2018. All deposits are guaranteed by Santander.

Is this good?

Deposit-based structured products like this are becoming more popular as savers look for alternatives to below-inflation returns offered in cash accounts and the benefit of Cater Allen's offering is that it's quite easy to understand and there is no cap on the upside.

The plan, which requires a minimum deposit of £5,340, can also be held in an Isa or Sipp - in which case returns will not be taxed. And investors who put their money in now will earn 0.5 per cent on their cash until the investment term begins on April 27.

What's the catch?

Whether this looks like an appealing investment depends on your view of the FTSE 100's potential for growth in the next six years and how strong you think Santander is.

If the FTSE falls, investors will miss annual interest that they could have earned in a cash account and if it rises they will miss dividend payments that they could have earned if they were directly invested in the market.

And although smoothing out the returns in the final year might counteract volatility, it could constrain growth.

Plan 12 is less attractive than Cater Allen's more generous, and recently closed, Plan 9 - which offered a potential return equivalent to a five-times rise in the market, capped at 40 per cent.

Investment returns depend on the strength of the counterparty - in this case Santander. If the bank fails, investors could lose their capital.

Last year Santander was downgraded from AA to AA- by leading credit rating agencies, because of a deteriorating outlook for Spain's economy.

Investments of up to £85,00 are protected by the Financial Services Compensation Scheme.

What's the alternative?

BM Savings has a five-year bond that pays out 4.65 per cent each year and Halifax has a five-year Isa that pays 4.4 per cent.

Morgan Stanley has a six-year FTSE 100 product which pays out the growth in the index over six years, or a fixed return of 35 per cent if the markets have risen by 10 per cent after three years, with the capital protected. But the product is not available as a cash Isa and the higher return offered is, in part, the result of the higher credit risk posed by Morgan Stanley as the counterparty, which has a lower credit rating than Santander. It has another offering to pay out twice the rise in the FTSE 100, but puts the capital invested at risk.

How can I find out more?

www.caterallen.co.uk/structured-products. The deadline for investing is March 30 2012.

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