As markets from equities to commodities succumb to ever-wilder mood swings, many private and institutional investors are, quite sensibly, hoarding cash. Given the attention focused on how creditworthy our banks are, some may well be tempted, as The Daily Telegraph’s Stephen Ellis notes, to “stuff it all under the mattress”.
However, that is not only rather risky, but also should be unnecessary, thanks to an investor safety net – the Financial Services Compensation Scheme (FSCS) – which pays out if a bank or building society holding your cash goes bust.
At first glance, the scheme is pretty simple; if a bank goes bust and a customer is unable to recover a cash deposit via the normal liquidation process, then they are entitled to claim 100% of any amount up to a maximum of £35,000. So far, so reassuring. However, there are some quirks to be aware of.
First off, the £35,000 applies per person and not per account. So if you have two accounts with a single bank, say a current account and an online savings account, the balances are combined to test the £35,000 threshold. Also, some banks, such as HBoS, have a single Financial Services Authority (FSA) registration for all of their operations – including the likes of Intelligent Finance, Birmingham Midshires, Halifax and Bank of Scotland. That means you only get a single £35,000 claim to cover balances across the whole group. So a cautious investor should limit single deposits to £35,000 and, ideally, spread them across different banks.
It’s also worth noting that the scheme only pays out if your bank is FSA-authorised. You can check this on the FSA Register, or call them on 0845-606 1234. Be aware too that certain banks, such as Bank of Ireland, ING, Landsbanki and Fortis, get their primary authorisation to operate here from local regulators rather than the UK FSA. Although you would still be entitled to claim from the FSCS should the local scheme pay less than £35,000, the process may take longer, given the complexities of dealing with two different regulators.
If this all sounds like a lot of homework for a simple cash deposit, remember that the Government’s bail-out of Northern Rock suggests a major UK bank is unlikely to be allowed to fail, so the FSCS may never be tested. That’s perhaps just as well, given that under new FSA rules from 1 April it can only raise a maximum of £4bn a year in funding, hardly enough to cover all the deposits in a major retail bank.
But if you still have doubts, consider investing with the Government-backed National Savings Bank instead. One savings product stands out if you don’t mind locking up your cash short-term – index-linked certificates. Running for three or five years, the investment limit for each is £15,000. They each pay tax-free interest at 1.35% above the retail price index (a key measure of inflation) currently sitting above 4%. For a higher-rate taxpayer that’s equivalent to a gross annual return of just over 9%, with your deposit guaranteed by the Treasury.