Wrappers

The choice of wrapper for a structured product is usually determined by the desired tax treatment and/or type of investment market towards which a product is directed. The following are the most common wrappers.

Deposit

A deposit is usually 100 per cent capital protected and the risk of default will be directly linked to the credit standing of the deposit taker. This is the simplest and cheapest wrapper. Returns are subject to income tax.

UK Life Bonds

A life insurance company buys derivatives and other financial instruments designed to give a specific return at a date in the future. These assets are held within the life insurance company as part of its general investment portfolio. The life bond will also offer a form of death benefit should the investor die before maturity. Life bonds often confer tax benefits on investors with many such bonds effectively paying basic rate tax for the investor. These bonds are often collateralised by a pool of securities which serves to diversify the risk.

Offshore Life Bonds

An Offshore Life Bond is similar in operation to the onshore variety but they enable returns to be rolled up and in certain circumstances rolled into a subsequent policy.

Pensions
Structured products are increasingly being used pensions both as Small Self Administered Schemes (SSAS) and Self Invested Personal Pensions (SIPPS).
One of the main attractions of including structured products in a pension plan is the capital protection element. Structured Products that are suitable for inclusion in a pension plan will state this in supporting literature and will usually include an application form tailored to pension investment.

ISA (Individual Saving Account)
An Individual Saving Account (ISA) is a UK savings wrapper that allows individuals to earn a tax-free return. The amount invested in an ISA is limited to a fixed amount in each tax year. In addition only certain qualifying investments can be held within an ISA and each has specific limits too.

ISAs replaced the Personal Equity Plan (PEP) and Tax Exempt Special Savings Plan (TESSA) products previously available in the UK and are guaranteed to run until at least 2010.

There are two types of ISAs - Maxi ISA and Mini ISA. An individual can only subscribe/contribute to either one Maxi ISA or up to two Mini ISAs (one for each component, each tax year. Money cannot be invested in both a Mini and Maxi ISA in the same financial year. With a Maxi ISA GBP7,000 can be invested tax free each year whereas with a Mini ISA the tax free exemption is for GBP4,000 only.

UCITS Funds

A UCITS (standing for Undertakings for Collective Investment in Transferable Securities) fund is a regulated fund registered in a European jurisdiction (usually Luxembourg or Dublin). It is a collective investment scheme whereby individuals typically purchase units in a fund that invests in a range of assets on behalf of the unit holders. Structured products written within a UCIT fund will generally be subject to higher costs than with other wrappers. The UCITS rules restrict the types of asset that can be included in a fund and as such limit the range of structured products permitted in this wrapper. A Non-UCITS Fund (or NURS) is an equivalent fund that requires regulatory approval but is not subject to the strict UCITS rules. Returns from UCITS funds are generally subject to income tax in the UK.

UK OEICs

An OEIC is a UK-registered fund that is a form of mutual fund that satisfies certain regulations regarding the composition of the underlying assets, pricing, availability etc. OEIC is an acronym for Open-Ended Investment Company.

In the UK, many funds that were previously structured as Unit Trusts have converted to OEICs in order to have a single price rather than two prices for buying and selling units. Structured Products can be written against these funds and in many cases returns are subject to capital gains tax.

Offshore Protected Cell Companies

These are typically special-purpose vehicles set up as Closed-Ended Investment Companies in Dublin, Jersey or Guernsey. Investment returns are offered in the form of shares. Returns are generally subject to capital gains tax and can also be ISAble.

Notes and Bonds

These are debt instruments issued by a financial institution in the form of MTNs or publicly issued Eurobonds. Bonds are typically issued as senior, unsecured debt and can be listed or unlisted. Listing of notes and bonds will usually be in London or Luxembourg and they will be held in either Euroclear or Sedol. MTNs are relatively easy to issue and have low transaction costs and as such make an ideal structured product vehicle. Often these are held as part of a plan.

Warrants

A warrant gives its buyer the right but not the obligation to buy or to sell a certain quantity of an underlying instrument at an agreed price. Warrants are essentially options listed and traded on an exchange. Certain option packages can be engineered as structured products with the advantage that they pay returns that qualify for capital gains tax. A warrant is a cheap and instantaneous wrapper.