Odds are you haven’t been paying that much attention to the small print of the average savings account over the last few weeks. But if you have any cash savings, you really should be.
Until a few days ago, when anyone asked us which was the safest bank in the UK, we always said Northern Rock. Why? Because it was 100% backed by the government. It didn’t matter how much cash you had stashed in the bank, if it had gone bust, the UK government would have been obliged to return every penny to all of us.
Not anymore. The guarantee expired on 25 May and has been replaced with the standard Financial Services Compensation Scheme (FSCS). Under this scheme – which covers most banks in the UK – you only get up to £50,000 back.
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So should you worry? Not much, but if you have more than £50,000 with the bank you shouldn’t be complacent either. Clearly the government thinks the Rock is now at very little risk, and in this case they are probably right. But the financial future is pretty unpredictable so we would still suggest trying not to keep over £50,000 in any one bank or financial institution.
However, before you rush to move your money, do note that there is an exception. Those who have taken out fixed-rate deposits with Northern Rock – a three-year bond for example – and who did so before 24 February 2010 will still benefit from the guarantee until the deal comes to an end.
Beware shared banking licences
There has also been a change to how the savings guarantees at Alliance & Leicester and Santander work. Under the FSCS, any person’s money is guaranteed up to £50,000 per banking institution. But that doesn’t always mean you get £50,000 per bank. It is based on banking licences. Sometimes two apparently separate banks share a banking licence, as they are both owned by the same parent company. But similarly, two banks owned by the same company could still have separate licences. See a breakdown of which banks share banking licences here – there is a multi-colour table halfway down the page.
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This is relevant to Santander and Alliance simply because Santander bought Alliance & Leicester back in 2008. Up until now they retained separate banking licences so you could still have invested £50,000 in each bank and had both lots guaranteed. But last week that changed. Alliance & Leicester was brought under the same banking licence as Santander. So now only the first £50,000 invested with both banks (and note that Abbey, Bradford & Bingley, Asda, and Cahoot all share that banking licence too) is guaranteed by the FSCS. So if you have more than £50,000 in total invested, you need to think about moving it to another bank or building society.
So where is the best place for your cash?
If you want to be able to withdraw your money at the drop of a hat, the highest rate you’ll get is 2.75% for an instant access savings account from ING Direct. Just be aware that the interest rate drops to the standard variable rate after 12 months. That is currently a particularly miserly 0.5%, so you’ll need to move your money then.
If you can give a bit of notice before you need your cash go for the United National Bank’s three-month notice Gold deposit account. You’ll get a rate of 3.02% AER and although the bank is Pakistan owned it has a British banking licence so your money is covered up to £50,000 under the FSCS.
Those of you prepared to tie your money up for a little longer should get an even better interest rate. That said, I wouldn’t go for much more than two years. There is a strong chance that the Bank of England base rate will rise before the end of 2012, and you don’t want your savings to be left behind.
The best one-year bond is from United National Bank again. The one-year fixed deposit [pdf] pays 3.25%.
And finally, you might look to Kent Reliance Building Society, which has the best two-year bond with a rate of 3.75%.
If you haven’t used this year’s ISA allowance yet then use that before you open a standard savings account as then you won’t pay tax on any interest you earn. The best short-term rate for an Isa is 3.25% for a one-year bond with Coventry Building Society.
But bear in mind the best ISA rates always appear just before the tax deadline at the start of April so now you might be better off opting for an instant-access or short-term notice Isa. Do so and you can transfer your cash when the top deals appear next year. You can get 2.67% with Cheltenham & Gloucester’s instant access Isa.
• This article is taken from our weekly MoneyWeek Saver email.
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