Are Your Savings Safe?
It's the question on the end of everyones lips at the moment - "Are my savings safe?". And quite rightly so, what with Northern Rock having to be bailed out and the Royal Bank of Scotland together with the Halifax having to merge with Lloyds TSB. Not to mention some massive US financial institutions hitting the rocks. Every sensible saver should be asking themselves, "Is my money safe?" Well, here's how it currently stands…
There is a statutory scheme called the Financial Services Compensation Scheme (FSCS), but it only applies to regulated financial organisations.
On July 1 2008, fast-track payouts were proposed by Chancellor Alistair Darling to help repair consumer confidence. He proposed that savers who lose money when a bank goes under will be given compensation within a week. He also aims to raise the amount of money protected from the current £35,000 to a new ceiling of £50,000. However, at the date of this post he has yet to raise this ceiling to £50,000 but it is likely to pass through parliament in Autumn 2008.
Is Every Type of Saving Protected?
No. In basic terms, cash-based savings are protected whereas investment-based savings are not. Therefore, typically any bank or building society account and also any cash ISA or Tessa Only ISA are covered by the FSCS.
For investment-based savings a different level of protection applies. If the product provider of an investment goes bust (e.g a bank offering a Shares ISA), you'll get the first £30,000 back, plus 90% of the next £20,000 (a total of £48,000); while pension and life assurance funds get the first £2,000 fully covered, plus 90% of everything else in them.
What Protection Do You Currently Have?
All UK deposits in bank or building society savings products are covered by the FSCS. This is an independent fund set up by UK financial bodies and regulated by the Financial Services Authority (FSA) which promises that, in the event of a bank collapsing, you'd get some of your money back. This applies to everyone, no matter their age, including children.
All of your savings are covered up to £35,000. The limit on joint accounts is £70,000.
A very important point to remember is that the protection is per institution and not per account. This means that if you’ve got masses of savings all in one bank, but different accounts, then only the first £35,000 worth is protected. But it gets a bit more complex as well because the definition of the term 'institiution' used here is "each company independently registered with the Financial Services Authority (FSA)." That means that several banks/building societies may belong to the same institution and therefore merely spreading your savings across several banks may not increase your protection. Complex? You bet. To get an idea of who may be linked with who, check out this bank ownership list
What If You Also Have Debts With The Bank?
Unfortunately, any debts with the same institution are subtracted from your savings. If you have debts, such as a mortgage, loan or credit card with a bank that you also have savings with, any outstanding debts will be subtracted from the savings before they calculate your compensation level.
Would You Get Your Money Back Straight Away?
If in the unlikely event of your bank collapsing, you wanted to get money out straight away, it's unlikely to be possible. The best guess (as it's never happened) is it would take a few months for peoples' accounts to be processed, and the cash returned.
Is There Any Risk That You Won't Get Compensated?
Who knows? This is unchartered territory. The FSCS doesn’t keep a pot of cash sitting ready and waiting. Instead, it has the power to operate a 'compulsory levy' on banks, insurers and others signed up to the scheme, as and when it needs the money.
However, the FSCS has a cap on how much cash it can levy per year from financial institutions; from 1 April 2008 the overall capacity was set at just over £4 billion. Yet in the FSA’s review document (page 77), it admits that £4 billion wouldn’t even cover the twenty-fifth biggest UK deposit taker!
That means there’s not enough money in it for all the main high street names. This is a tad worrying to say the least, although of course the Government’s main focus is to avoid ever getting into a situation where the FSCS would need to pay out.
Are There Any Alternative Options?
There is of course one place where your money is 100% guaranteed, no matter how much you have saved. All savings in Northern Rock and National Savings & Investments (NS&I) are 100% guaranteed. Why? Because they are owned by HM government so one would assume that they will never go bust. NS&I products constitute premium bonds, Direct ISA and Index-linked Savings.
