Making your Savings safe - what you need to know

It’s likely that recent financial events have left you feeling uneasy about saving and investing your money into UK banks at the moment. And you’re not to blame. The near collapse and nationalisation of banks such as Northern Rock and Bradford & Bingley in 2007 saw nervous customers queuing along the highstreet to withdraw money out of their accounts. Instead of panicking, savers instead should be aware of the various systems in place and strategies they can use to make sure their savings remain safe. And stuffing savings in box under the bed isn’t an option.

Your money IS safe…

The UK compensation system has seriously toughened up is act following the financial crisis in 2007. Money now that has been saved into a savings account or cash ISA in a high street bank, credit union, or building society are all protected under the Financial Services Compensation Scheme (FSCS). Up £85,000 per institution per person is covered and can be reclaimed should they go bust.

…but know the small details

The FSCS will cover any UK regulated bank. The majority of banks or building societies in the UK are UK regulated but foreign-owned ones such as Australian owned Clydesdale and Spain’s Santander are too. However, a few EU-owned banks can opt for a different ‘passport scheme’ meaning that a recovery of savings is entirely dependent on that particular country’s independent compensation scheme, if they have one at all. This includes Bank of Cyprus, ING Direct and Triodos. If you feel uncomfortable investing your money without the deposit guarantee scheme then you may want to avoid these banks.

Institutions and Banks - there’s a difference

It’s important to reiterate that the FSCS will cover up £85,000 per institution - not account - per person. So three accounts with one bank will still only get this £85k limit. On top of this, what constitutes an institution will depend on its banking licence. Many institutions operate under the same banking licence and it’s important to know which may be connected. For instance, Barclays and Standard Life are sister banks and therefore accounts are only covered up to £85k combined. However, although NatWest is a subsidiary of Royal Bank of Scotland (RBS) they remain separate. This means that the £85k limit applies to both banks.

The following providers are considered part of the the same bank for compensation purposes:

The AA, Bank of Scotland, Birmingham Midshres, Halifax, Saga, Intelligent Finance.
Alliance & Leicester, Cahoot, Santander.
Bank of Ireland, Post Office.
Barnsley Building Society, Chelsea, Egg, Yorkshire Building Society, Norwich & Peterborough Building Society.
Britannia Building Society, Co-op Bank, Smile.
Lloyds TSB, Cheltenham & Gloucester.

Other major banks such as Tesco Personal Finance, Sainsbury’s Bank and Natwest are all separate institutions.

The per-person rule of the FSCS means that joint-accounts will receive double the compensation - £170k.

Spreading your savings

As a consequence of the points mentioned above, savers with large amounts of money should consider spreading their savings across banks from different institutions. As a guide, savers should take interest into consideration and therefore should save a few thousand pounds less than the £85k limit. Whilst the FSCS can provide compensation up to this limit should anything go wrong, it could take anything from a week to over a month to sort out. Even savers with small amounts of money should consider spreading their money so that they have access to at least one account if another were to fold. Two accounts help mitigate the risk of total inaccessibility of your money.

Whilst this is meant as a guide, it may be of help to savers to seek independent financial advice when selecting different accounts to spread financial risk. You will still want accounts with competitive interest rates to maximise return.

This post was written by John Hughes who is the resident blogger at www.independentfinancialadvisor.co.uk, a UK based site that provides access to financial advisors as well as to debt advice charities for those struggling with their debts.