I appeared on ITV’s Tonight show last night as a member of a panel attempting to answer the big questions of the moment. The easiest one to answer was “Will house prices keep falling?” Of course they will. They’re far too expensive on every conceivable historical measure, and even if they weren’t, the lack of availability of mortgage finance plus the growing aversion to property investing would push them down anyway.
Much harder was “Is my money safe in a UK bank account?” I think the answer to this is yes – I just can’t see how it could be politically possible for Gordon Brown or sidekick Alistair Darling to allow a UK high street name, however big or small, to go under at this point. That said, it isn’t completely impossible. So it is worth reviewing just how much risk you are taking when you put your money in a savings account.
Financial Services Compensation Scheme: things to be aware of
The key thing to know is that the first £35,000 you have per financial institution is 100% protected by the Financial Services Compensation Scheme. This sounds good, but it isn’t totally straightforward. First, note the “per financial institution” bit. It isn’t per account. So if you have two accounts at a bank – say an instant access account and a notice account that pays higher interest – you will still only be eligible for a potential total payout of £35,000 even if the combined total comes to more than that.
It also isn’t per bank. Many banks have merged together over the years but kept separate brands. Halifax and Bank of Scotland are, for example, part of the same institution. And thanks to the merger of their parent HBOS and Lloyds TSB, they too are the same institution. So if you’ve got money with say, Lloyds and with the Halifax, you will now only be protected up to £35,000 for the lot.
A foreign bank account is a potential admin nightmare
Now for the really complicated bit. If you have money in a foreign bank, you aren’t just covered by the UK insurance scheme. Instead, in many cases you have to reclaim some of the compensation abroad and the remainder in the UK.
If you have an account at Icesave, for example – as millions of British savers do, thanks to its very high interest rates – and it goes bust, you have to claim the first €20,000 from the Icelandic authorities and the balance from the UK authorities. Sound like an admin nightmare? It would be.
That said, just reclaiming in the UK could well be its own admin nightmare. Someone involved with the scheme told me last week that they aim to pay out within six weeks. That’s a worthy aim and it may even be possible, when the odd mismanaged credit union goes down, but what if a major name were to suddenly go? No way would you get your money back in six weeks. For starters, the scheme isn’t prefunded – there isn’t a big pile of money sitting around in it waiting for disaster. Instead, the money is supposed to be levied from the big financial institutions in the wake of a disaster. That might not be so easy. Which would mean the state (read taxpayer…) would have to cough up – something that would need legislation and drag things out for months.
The safest place for your savings right now
So how can you avoid all the worry and bother of all this? I’ve written before about Northern Rock, but it bears repetition simply because it offers very good interest rates (the eSaver rate has just been cut from 6% to 5.75%, but that’s still a pretty good deal) and has the 100% backing of the government. Regardless of how much money you have in your account, it is totally safe. Well, as safe as anything backed by the government can ever be.
The other possibility is, as ever, National Savings & Investments. Anything you get NS&I is safe, but you do pay for your peace of mind – the interest rate on the esaver account starts at a pathetic 1.85%.
Finally, if you have over £35,000 and under £80,000, and you are prepared to take the risk of having to do a little admin to get your money back if needs be, you might look at Anglo Irish Bank currently paying 6.4% on instant access savings accounts and over 7% on a nine month fixed rate bond. The Irish government have just taken the hefty – and impressive – confidence restoring move of increasing the limit for their deposit scheme to €100,000 per person (around £78,500) per institution. Find out more here on how this scheme works. I suspect that the UK government will soon have to do the same, but until then this new limit is as good a reason to give your money to the Irish as any.
PS There’s one more complication with the FSCS scheme. If you have debt and savings at the same institution and that institution goes bust, you will find that your debts are automatically subtracted from savings leaving you with a net figure. This doesn’t mean you lose money, but it does mean you lose control over your savings – a good reason to keep your mortgage and your savings in different places perhaps.
• This article is taken from Merryn Somerset Webb’s weekly Money Sense email. Sign up to Money Sense here.