How Safe are your Savings?

The global financial crisis has demonstrated that banks are no longer the rock-solid financial institutions they used to be. Twelve months ago, few people would have predicted that the world’s major financial corporations would have failed, with some forced to close, and others seeking government cash injections to continue operating.

Choosing a safe home for your money has become more important than ever. So should we continue to trust banks with our hard-earned savings, what protection is available and how can you make sure your savings are safe?

The good news is that there is a system in place that you could turn to if your bank goes bankrupt. The Financial Services Compensation Scheme (FSCS). On 3 October 2008 the Financial Services Authority (FSA) announced that the FSCS compensation limit for deposits had been increasing from £30,000 up to £50,000 with effect from 7 October 2008.

The new limit applies to each in individual depositor, and guarantees the total of deposits they hold with an organisation up to £50,000, regardless of how many accounts they hold or whether they are a single or joint account holder.

If you hold a joint account, the scheme will base your compensation claim on the assumption that the money in the account should be equally split between all the account holders.

With this increase of the compensation scheme limit, the UK Government has shown that it is willing to take considerable steps to insure that no financial institution will close while it still owes its clients money. The only UK savings bank that has gone into liquidation, Icesave, happened as its structure meant it was technically an Icelandic bank, not a UK one. Yet even in this case, the UK Government has pledged that all investors will be covered, even beyond the £50,000 compensation limit.

Where Should I Keep My Savings?

For anyone lucky enough to have savings of considerably more than £50,000, the safe way to protect your investment is to spread it around. To make sure that you will be fully compensated in the unlikely event that your bank or building society goes bust, you should make sure that you do not have any more than the £50,000 limit in any individual institution.

There has been a lot of mergers and consolidations within the banking world in the last few years – for example Abbey National is now owned by the Spanish bank Santander – so before you invest you should make sure that know whether the bank you are investing with has a parent company that you didn’t know about.

If you have less than £50,000 in savings, you should not worry, as your money will be safe. However, if a bank were to go bust, you will have to claim compensation, which could take time. If you think that you may need access to your savings at short notice it may be worth splitting it across various institutions, just as you would if you had savings above the £50,000 compensation limit.

Investments Are Not Classed As Savings

The rules for investments are different. If you put your money into shares or investment funds (including pension funds), then you will not be covered under the Financial Services Compensation Scheme. This is because investments are considered risk-based products, not savings. Investment protection will only apply if the product provider of the investment goes bust. If you have bought stocks and shares and the company goes bust, you will not receive compensation.

Similarly, if you have a stocks and shares ISA that performs poorly, you will not be able to claim back your original investment. However, cash ISAs are protected because they are all classed as a tax-free savings product, rather than a risk-based investment.

Still Concerned?

If you want to find out more about the Financial Services Compensation Scheme, or the list of banks covered by the scheme, you can visit the website www.fscs.org.uk.