Bank collapse was once easy to dismiss, then the credit crunch bit, global market turmoil hit, and logic was turned upside down. In the UK alone, we've seen the bail out of Northern Rock, Bradford & Bingley, Kaupthing and the need to compensate Icesave savers. Add in Farepak and every sensible saver should ask, "is my money safe?"
This is a full savings safety-check up and Q&A, showing you how to ensure you're protected, maximise your safe savings, and the pitfalls to avoid.
A. No! There is a statutory scheme called the Financial Services Compensation Scheme (FSCS), but it only applies to organisations regulated by the Financial Services Authority (FSA). This was the big problem with the Christmas Savings Scheme Farepak, as it had no protection whatsoever; when it went bust the money was gone.
As will be explained in more detail later, the FSCS covers the first £50,000 per person, per institution. The main categories of protected savings are:
Bank and Building Society accounts.
If you want real safety the answer is a Bank or Building Society savings account, current account, small business account (with annual turnovers below £1 million) or credit union, but not savings stamps or hamper schemes. Specifically this is any UK registered bank (see later for how this impacts foreign banks' UK subsidiaries).
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Any cash ISA (or Toisa).
These are simply a form of tax free savings account so they have the same protection. If you have a Cash ISA or had one of its forerunners, the Tessa Only ISA (Toisa), then you get exactly the same FSCS protection as in a savings account.
Investing is different.
It's important to understand, we're talking about ‘saving’ not ‘investing’. If you put money in stocks and shares or funds that invest in them, including pension funds, then you’ve got a “risk based” investment NOT savings, and a totally different FSCS protection applies.
It's very important to understand that this protection with investments applies if you lose money due to the product provider of the investment going bust (e.g a bank offering a Shares ISA). Yet if the underlying investment goes bust, i.e. you have shares in a company and it goes kaput, or you've bought a fund and it performs poorly, then you’ve no protection as that’s the nature of investing.
However sometimes you’re just buying shares or funds through a company, e.g. some stockbrokers just sell you shares, so if the stockbroker went bust, you’d still have the shares. In that case, as you wouldn’t be impacted at all, there’d be no compensation.
Investment FSCS protection is very complex, and can vary with each product's structure. Always check with your provider.
- Investments.
If you've invested in an investment fund (e.g. through a discount broker), you'll get the first £30,000 back, plus 90% of the next £20,000 (a total of £48,000).
- Pensions & Life Assurance.
Stakeholder pensions and money paid into life assurance products usually fall under the category of 'long-term insurance', meaning the first £2,000 is fully covered, then 90% of everything else in them. This is the same even if your stakeholder pension is held in 'cash funds'.
- Self Invested Personal Pensions (SIPPs).
A Sipp is a completely DIY pension. which gives you complete control of your pension pot – for better or worse! The protection your cash gets depends on how you decide to use it. But importantly, in general the cash is ringfenced from the Sipp provider, meaning if IT goes bust, your money is safe.
If you choose to invest in stockmarket funds or other investment vehicles, 100% of the first £30,000 is covered plus 90% of the next £20,000 (a total of £48,000). It's also possible to hold the money as cash within the Sipp; here you are covered under the standard £50,000 per person per institution. Sipp providers will tell you which banks the cash is held in, so you can check if it's linked to any others you have savings with (See Institutional links table).
What if my insurance company goes bust?
If you take out home, car, travel or even PPI loan insurance, and the provider goes into default, then FSCS cover also kicks in. There are two main ways in which it protects you.
If you need to claim when a company’s gone bust
The FSCS's main objective is to 'maintain continuity'. This means if your insurer goes bust, it will try and find another provider to take over your policy, or issue a substitute policy. However, if you have any ongoing claims, or need to make a claim before a new insurer is found, the FSCS should ensure these are covered..
• If it goes bust and you’ve paid upfront
If you’ve paid for cover for a year, but the company goes bust after a month or two, then you would lose out. To protect against that, if the FSCS can't transfer your policy to another provider, you'll be given a period of time to take out alternative insurance, and any money you've already paid as a premium will be refunded as compensation via the FSCS. To help explain, here's a quick example...
You took out a 12 month insurance policy on January 1st, and paid in full upfront. If the insurer goes bust on September 1st, and the FSCS can't get the policy transferred, then you will receive compensation worth 4 months of the original cost.
The limits of the compensation depend on whether the policy is compulsory or not. Compensation for policies like third party car insurance, which you are required by law to have, are unlimited, meaning you get 100% of the premium back. Otherwise, non-compulsory insurance policies (e.g. home, travel, payment protection) have a coverage of 100% of the first £2,000, then 90% of the rest.
What isn’t covered?
The answer is pretty much everything else. If you’ve a savings scheme for a hamper or Christmas club, got money in Paypal, cash stored up with a cashback site or points in a loyalty card scheme, then you may be protected by an industry scheme but not the government scheme.It’s also worth being aware that if you’re ordering or buying goods where you don’t receive them immediately, such as as a kitchen, flights, computer, then the purchases aren’t covered either. Though there is a way to protect yourself for free, see the Is my Spending Safe? guide.
A. Within a year, this has shifted from unthinkable, to unlikely, and now we’ve seen major banks need full scale rescues, nationalisations or actually go bust and trigger compensation payouts.
The focus of this guide is the FSCS compensation scheme, yet actually that should be seen as the last line of defence, politicians are stepping in with alternative remedies before it gets that far.
What's happened so far?
The nationalisation of both Northern Rock and parts of Bradford & Bingley, and urgent transfer of Kaupthing Edge’s savings to ING Direct, can be seen as a huge government statement of intent that it'll take extreme action to avoid a bank going to the wall.
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 then the government says every penny, not just the £50,000 compensation limit, will be covered.
Even with this though, while the government intent seems to be for no one to lose any cash regardless of the amount they save, that ISN’T guaranteed. So it's important to think this way...
The UK govt. intent is to protect all savers, but only the £50,000 is guaranteed so that needs to be the focus
Which banks/building societies are most likely to go?
It's virtually impossible and certainly irresponsible to try and pick one. Part of the original Northern Rock problem was one of sentiment; the bank's actual problems weren't huge, until wild-fire rumour meant people lost confidence, the queues to withdraw started, others saw them and panic ensued.
Many people made silly decisions, such as withdrawing money from cash ISAs which were protected, and losing their tax-free status. The knock on effect was a run on the bank, and from that moment it was doomed.
There've been many rumours over the last year, some turned out to be true, many were nonsense. Picking out a collapsing bank is an incredibly difficult thing to do; even the niche City specialists don't know, and it's certainly far from my own speciality or the speciality of this site. Worse still, by doing so it could hasten or even cause a collapse, by creating a bank run where it wouldn't have happened otherwise.
Some of those which have been in trouble, like Merrill Lynch and Goldman Sachs, were once thought of as untouchable bastions of Wall Street. Therefore the best thing to do is rely on the protection not the rumour mill, as it's impossible to pick what's real.
Yet if you want to check the financial strength of a big public company check its credit rating , AAA being the best and then graded downwards. Yet the sheer speed of change in the current financial contagion means even this isn’t a particularly reliable indicator. To check your bank’s strength use Standard & Poor's, though it's not overly simple to use; for a quick search try Fitch Ratings instead.
A. All UK deposits, which includes money saved and accumulated interest, in bank or building society savings products, are covered by the Financial Services Compensation Scheme (FSCS).
This is an independent fund set up by UK financial bodies and regulated by the FSA, which promises that, in the event of a bank collapsing, you'd get some of your money back, though it's likely you'll lose access to the cash while compensation is being dished out.
This applies to everyone, no matter their age, including children. Remembering the exact amount you get is so crucial, it needs to be written large.
"The first £50,000 you have saved per financial institution is protected."
Let me run through some of the rules...
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This only applies to defaults after 7 Oct 08.
The amount has been changed twice, on the back of Northern Rock and then Bradford & Bingley and the amount you get depends on what the limits were at the time of the 'compensation trigger'. Then again the only institutions that this applies to are very small, niche players.
Defaults before 1 Oct 07. You'd get 100% of the first £2,000 of your cash back and 90% of the next £33,000 on top; so you'd get £31,700 of the first £35,000 back.
Defaults between 1 Oct 07 and 6 Oct 08. If it went bust between 1 Oct 2007 and 6 Oct 2008, you'd get 100% of the first £35,000 back.
All defaults after 7 Oct 08. Get the full £50,000 per person, per institution.
The limit's doubled in a joint account.
Money saved in an account registered in two names receives twice the protection; that's therefore the first £100,000. Don’t get too excited though, this isn’t an extra allowance; it’s simply the same protection as if each account holder had a separate account.
In fact the best way to think about this is half the money in the account belongs to each person. An example should help...
Sensible Steve has £100,000 in a joint account in RiskyBank with his girlfriend Saver Sally, plus £20,000 in a separate account of his own with the same bank.
If RiskyBank went bankrupt, then if you consider half the joint account money, £50,000, is Steve's, then added to his separate savings that's £70,000. Which means he would lose £20,000.
This means, if you work through it, it is possible that you lose out by having a joint account...
Imagine Reckless Rick and his partner Rachel have a RiskyBank joint account with £90,000 in, plus Rachel has £10,000 in her own account with the same bank.
Here, if the bank went bust, the full joint account balance would be covered; it is split out as £45,000 each, so Rachel only then has £5,000 worth of protection left to cover her separate account, leaving the other £5k at risk.
So even though between them they've only £100,000 in savings, it's not all covered by the compensation scheme. They would've been better off simply having all the money in the joint account, or having £50,000 in separate accounts each.
- The protection is per institution NOT per account.
This is a crucial point, the FSCS protection does not apply per account but per financial institution. In simple terms that means if you’ve got masses of savings all in one bank, but different accounts, then only the first £50,000 worth is protected.
Yet it's sadly more complex than that, as sometimes different banks that are part of the same group count as just one institution. More information later in the what counts as an institution? table. -
The threshold includes interest too.
The £50,000 limit applies to all the money in the account at the time the bank goes bust, meaning if you have accrued any interest, if it takes you over the threshold then it wouldn't be covered. So for total safety you should hedge and maybe put a maximum £49,500 or so in any one account
Any debts with the same institution are subtracted from your savings.
A piece of minutiae in the Financial Services Compensation Scheme rules dictates that 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. For example if you have £20,000 in savings and a £15,000 loan, in the unlikely event that bank went bust you'll only get £5,000 compensation.
While at first glance this seems awful; in actual fact you’d be no worse off; as you would no longer owe the debt, even if it were sold on to another institution (or if your debts are bigger than your savings the amount owed would be reduced); although the flexibility of spending the savings on something else has disappeared..
The main negative is that the decision of whether to pay off your debts with savings has been taken out of your hands. While with most loans and credit cards this is a good thing (see the Should I Pay off my Debts? guide), if it’s mortgage debt it's not always a good idea (see Should I Pay off my Mortgage? guide). If this worries you, it's best to have your savings in a separate financial institution to your mortgage.
Another note here; the FSCS makes sure banks adhere to this system, but building societies are not bound by the same conditions. Most do operate in the way described here, but it's definitely worth double checking if you have both savings and debt with one building society.
It's also worth being aware this situation would be complicated, if the debts and savings of a bank were separated (as happened with Bradford & Bingley) and it simply isn't clear how this would impact things.-
Protection wouldn't be paid out instantly.
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 is it would take a few months for peoples' accounts to be processed, and the cash returned; though there are moves underway to set up systems that would make potential payouts quicker.
Offshore accounts may not be covered.
Any savings held offshore, i.e., particular types of savings account not any money held in a non UK bank, are usually regulated by the local financial authority, rather than the FSA. As the FSCS protection only applies to companies regulated with the FSA, if your savings are held offshore check with your lender where it is regulated. For example, the FSCS does not cover savings outside the EEA, or even in the Channel Islands or Isle of Man.
Sadly, it's a bit more complex than it first appears. The technical definition is that you get the FSCS protection for each company independently registered with the FSA. Yet over the years, many banks have merged or been taken over, blurring the lines over what actually constitutes a financial institution.
This means, bizarrely, that you only get one lot of £50,000 for the whole of HBOS, which is the combination of the Halifax, Bank of Scotland, Birmingham Midshires and others. Yet if you had money in the Royal Bank of Scotland, NatWest and Ulster, which are all part of the giant RBS banking conglomerate, you would be separately protected in each of them.
The 'What counts as a bank?' table.
The table below shows you which banks (not investment companies) are standalone and which are part of the same institution. Any banks shaded in the same colour (except white!) are linked and share protection, so if you have money in a combination of linked banks you only get one lot of the FSCS safeguard.
As an aid to the colour blind, institutions which share an FSA registration are also number coded in brackets.
Which savings providers count as one financial institution?
AA (1) |
Aldermore (14) |
Alliance & Leicester |
Abbey (2) |
AK Bank (P) |
Allied Irish |
Anglo Irish (P) |
Asda (2) |
Bank of Cyprus (P) |
Bank of Ireland (4) (P) |
Bank of Scotland (1) |
Barclays (10) |
Barnsley BS (12) (See note) |
Birmingham Midshires (1) |
BMW Savings (5) |
Bradford & Bingley (2) |
Britannia(See note) |
Buckinghamshire BS |
Cheltenham & Gloucester (6) |
Cahoot (2) |
Cambridge BS |
Capital One/Castle Money (13) |
Cater Allen |
Chelsea BS |
Chesham BS |
Cheshire BS (See Note) |
Citibank |
Close Brothers |
Clydesdale Bank (7) |
Coutts |
Coventry BS |
Credit Unions (all separate) |
Cumberland BS |
Derbyshire BS (15) (See Note) |
Direct Line (8) |
Dunbar Bank |
Dunfermline BS (15) (See Note) |
Ecology BS |
Egg |
First Direct (9) |
First Trust |
Firstsave |
Furness BS |
Halifax(1) |
Hanley BS |
Harpenden BS |
Heritable Bank (11) |
Hinkley and Rugby BS |
HSBC (9) |
Icesave (P) |
ICICI |
ING Direct (11) (P) |
Intelligent Finance (1) |
Investec |
Ipswich BS |
Julian Hodge Bank |
Kaupthing Edge (11) (P) |
Kent Reliance BS |
Leeds BS |
Leek BS |
Liverpool Victoria |
Lloyds TSB (6) |
London Scottish Bank |
Loughborough BS |
Marks and Spencer |
Manchester BS |
Mansfield BS |
Market Harborough BS |
Marsden BS |
Melton Mowbray BS |
Monmouthshire BS |
Norwich & Peterborough BS |
National Counties BS |
Nationwide (15) (See Note) |
Natwest (separate to RBS) |
Newbury BS |
Newcastle BS (5) |
Northern Bank |
Nottingham BS |
Post Office (4) (P) |
Principality BS |
Progressive BS |
Raphael Bank |
Rothschild |
Royal Bank of Scotland (8) |
Ruffler Bank (14) |
Saffron BS |
Saga (1) |
Sainsburys |
Scarb'gh BS (13) (See note) |
Scottish BS |
Scottish Widows Bank |
Skipton BS (13) (See note) |
Smile (3) (See note) |
Standard Life |
Stroud & Swindon BS |
Teachers BS |
Tesco |
The Co-op (3) (See note) |
Triodos (P) |
Ulster Bank |
United Trust |
Virgin Money (8) |
West Bromwich |
Whiteaway Laidlaw |
Woolwich (10) |
Yorkshire Bank (7) |
Yorkshire BS (12) (See note) |
| This table was compiled by checking the FSA registration number of each bank on their websites, and is based on the FSCS definition that each independently registered institution receives the £50,000 protection. If an insititution is not listed it does not mean it is not protected. (P) These European-owned UK banks are protected very differently; read Passport scheme. | ||
What about HBOS/Lloyds and the other bank takeovers?
Banks merging and launching takeovers has caused the complicated situation explained in the table above. This also means we need to keep a close eye on ongoing takeovers and amalgamations of banks to see if the FSA registrations are affected.
-
HBOS/Lloyds
After Halifax Bank of Scotland (HBOS) got into trouble in autumn 2008, Lloyds TSB came in to take it over, and in January 2009 it was confirmed that their FSCS licences will remain unchanged. So these two are separate institutions, meaning if you’ve savings in both, they’re covered up to £50,000 each.
Yet do note the constituent parts of HBOS (Halifax, B'ham Midshires, Intelligent Finance, The AA & more) only count as one institution, as do Lloyds and Cheltenham & Gloucester, so multiple accounts with these get just £50,000 cover. -
Abbey, Alliance & Leicester and Bradford & Bingley
The giant Spanish bank Santander owns both Abbey and Alliance & Leicester and the savings business of Bradford & Bingley & Asda, and their FSA protection set up is complex to say the least.
The key is that for EXISTING savings, there are two lots of £50,000 per person protection; one for A&L and one for the others. Once the rebranding process described below is complete, all NEW savings will be protected by one lot of £50,000.
The specifics...
If you've already got money in Abbey & Alliance and Leicester, that cash falls under their seperate FSA registrations, meaning you’re protected up to £50,000 in each.
However, both banks are rebranding to Santander and it's expected that, once this is complete (likely to be in 2010), all new savings in either are expected to come under a single registration. This means savers will get just one lot of £50,000 protection.
Bradford and Bingley's savings wing has been bought by Santander, and merged with Abbey. That means only one lot of £50,000 protection applies if you have B&B, Asda, Abbey or Cahoot accounts. Once the rebranding is complete, no A&L branded accounts will be available.
However, we asked Santander whether extra money paid into old A&L accounts will be covered under its seperate licence, and it couldn't confirm or deny anything. So watch out; another institution to spread savings into may disappear soon; all updated will appear here and in the free weekly email. -
Nationwide/Derbyshire BS/Cheshire BS/Dunfermline BS
Big building society Nationwide has snapped up three smaller ones, Derbyshire, Cheshire and Dunfermline. Your level of protection depends on when you FIRST put savings into any of the institutions.
Prior to either merger date (1 Dec 08 for Derbyshire BS, 5 Dec 08 for Cheshire BS, 30 March 09 for Dunfermline), if you had savings in more than one of the institutions, even just £1, then you will retain separate cover of £50,000 in each until 31 December 2009.
In theory, this means if you had any money saved with each of the building societies prior to the relevant merger date for each one, you could have up to a total cover limit of £200,000 across all four, until December 2009.
However, if you start saving in the institutions now, you only get one lot of £50,000 cover across all the accounts. By December 2009, the FSA is hoping to have a longer-term solution in place. -
Yorkshire & Barnsley BS
These two northern building societies merged on 31 December 2008, and will use the temporary FSA measure as Nationwide. This means if you had savings in each before 31 December 2008, you retain two lots of £50,000 protection (£100,000 in total), until December 2009. Otherwise, you'll just get £50,000 across the two institutions.
-
Skipton/Scarborough BS
North of England building societies Skipton and Scarborough have merged. Again, the temporary measure will be put in place until December 2009, meaning if you had savings in both before 28 March 2009, you get two lots of £50,000 protection (£100,000 in total), otherwise you just get one.
-
The Co-op & Britannia
These two (now ex-)building societies merged in 2009. However, they will use the same temporary FSA measure as Nationwide, and maintain separate protection for existing savers until 31 December 2009.
So, if you currently have savings in both Co-op and Britannia, or start saving with both of them prior to the final merger date of 1 August 2009, you will have £50,000 worth of protection in both (£100,000 in total) until the end of September.
A. There are more banks than you think which are owned by non-UK companies, such as Abbey, Alliance & Leicester and Egg, alongside the more recognised foreign names such as ICICI and First Bank of Nigeria.
Many non-UK banks offer competitive savings products to UK consumers; it's been a boon for savers, as interest rates have been pushed higher. Yet actually the way they’re registered here means many of them are covered in exactly the same way as UK banks by the compensation scheme, so you'd get the £50,000 protection in exactly the same way.
Yet compensation is the secondary level of protection
It is to be hoped the UK government would arrange a bailout rather than allowing the compensation to be triggered if a bank gets into trouble. This hasn't just happened with Northern Rock and Bradford & Bingley but also with Kaupthing Edge, which while Icelandic owned, was a fully UK regulated subsidiary.
Even so, it's still worth keeping your cash within the £50,000 limit where possible, as it's an aim but not a promise to bail out banks that fail, so there's naturally slightly less surety, especially with non European banks.
There are many questions about Indian parent bank ICICI, though the UK subsidiary has the full £50,000 protection. We don’t review individual bank solvency, but read my blog about it, with links to relevant sites: ICICI: How safe is it?
Some European banks have less protection
Some European banks don't count as UK subsidiaries, as they’ve opted for a slightly different protection, called the Passport scheme. Not only does it become more difficult for the UK to step in, but the compensation comes from elsewhere too.
This 'passport scheme' allows some banks from the European Economic Area to rely, in the first instance, on their own country’s compensation schemes. Banks from outside the EEA CAN’T take part in this and must have the full FSCS compensation.
It's worth noting if you have savings in a European bank that's currently fully covered by the FSCS, and it then decided to opt for the passport scheme, it would have to inform you of the change.
It’s the passport scheme that caused the problem with Icesave; after nationalising its parent bank, the Icelandic government signalled it was not going to honour this EEA agreement, and thus left UK savers in the cold, until the UK government stepped in. Whether that can happen again is anyone's guess, and either way most of the banks in the scheme come from bigger countries.
The exact protection you get depends on the level of compensation offered, compared to the UK's £50,000...
Where the country’s compensation is LESS than the UK's.
If the EEA country’s compensation scheme is lower than £50,000, it operates as follows:
-
The home country provides compensation. The first amount would need to be claimed from that bank's home country's own compensation scheme, though this may logistically take place through the FSCS.
-
The UK scheme tops up the rest. Any amount not covered is topped up to £50,000 by the UK scheme. e.g. if the overseas scheme covered £20,000 the UK scheme would cover the remaining £30,000.
Where the country’s compensation is MORE than the UK's.
If the overseas scheme covers more than £50,000, then any banks covered by it must opt completely out of UK FSCS under EU law, meaning ALL the protection is provided by the foreign scheme. Therefore…
Save with one of these and your savings safety depends on the stability & solvency of a foreign government.
There are two very noticeable examples of this:
- Ireland.
The Irish government has guaranteed all savings up until 2010, plus it has nationalised Anglo-Irish Bank. As the Irish-owned UK banks operate the passport system, your safety is solely reliant on the solvency of the Irish government. This is something you must be aware of and research if you have money there.
As a note, all savings in Post Office accounts are under the Bank of Ireland's licence, hence guaranteed by the Irish government, except its Child Trust Fund.
- ING Direct.
The mammoth Dutch savings bank, which also took control of Kaupthing Edge, is covered by the Dutch compensation scheme, which has a limit of €100,000. If it were to go bust, you would be entirely reliant on the Netherlands government to get your cash back.
Below is a full bank by bank list of the protection scheme on major foreign owned banks operating savings products in the UK.
Non-UK banks: How do their compensation schemes work?
| Name of bank | Amount covered outside UK | |
| 100% covered by the UK's FSCS (not part of the passport exception) |
||
Abbey (Santander) |
- |
|
Alliance & Leicester (Santander) |
- |
|
Allied Irish Bank (UK) (Allied Irish ) |
- |
|
Asda (Santander) |
- |
|
Bradford & Bingley (Santander) |
- |
|
Citibank (Citigroup) |
- |
|
Clydesdale Bank (National Australia) |
- |
|
Egg (Citibank) |
- |
|
Firstsave (First Bank Nigeria) |
- |
|
- |
||
Yorkshire Bank (National Australia) |
- |
|
| Banks NOT covered by the UK scheme | ||
€100,000 (Netherlands) | ||
All deposits until Sep 2010 (Ireland) |
||
€100,000 (Cyprus) |
||
All deposits until Sep 2010 (Ireland) |
||
€100,000 (Netherlands) |
||
Now part of ING Direct €100,000 (Netherlands) |
||
All deposits until Sep 2010 (Ireland) |
||
€100,000 (Netherlands) |
||
| Covers foreign banks that have been in Top Paying Savings Account or Top Paying Cash ISA articles | ||
A few banks have much less protection.
One area deserves a theoretical warning; it's possible for a European bank to operate in the UK using only its home compensation scheme. Depending on the amount covered under that scheme, your savings may be less protected than the £50,000 that the UK's FSCS provides.
In this situation, the foreign bank will not be FSA regulated, and no banks currently mentioned on this site work that way; however if you find any foreign banks not mentioned here, be vigilant; ask it how its compensation works.
Check out banks on the FSA website.
To check out a bank's status, click through to the bank listings on the FSA website, select the most recent date, and you'll get a huge PDF document. All banks in the 'Banks incorporated in the United Kingdom' category are fully covered by the FSCS, while institutions listed under the catchy title of 'Banks incorporated outside the EEA authorised to accept deposits through a branch in the UK' only have their home compensation scheme, unless they are on the FSCS top up list.
While safe savings worries are a worldwide issue, the Icelandic banking system and economy has been the worst hit. Both its big banks have been best buys for UK savers over recent years, and now they've come crashing down. If you had money in either, this is a vital rundown of what's happened.
Kaupthing Edge: Now part of ING Direct
Kaupthing Edge was a full UK regulated subsidiary of Icelandic bank Kaupthing, and had been the top paying savings account. On Wed 8 Oct, after the collapse of the other Icelandic Bank Landsbanki the UK government used its powers to transfer all Kaupthing savers' money to Dutch Bank ING Direct.
It did this to protect UK savers, though the Icelandic government has mooted it was this transfer that caused its parent Kaupthing itself to collapse. The UK government also took similar action for Heritable Bank (part of Landsbanki, which also owns Icesave) so it's now part of ING too.
In terms of operating this account, it's now fully operated via the ING Direct website. After the switch, ING offered Edge customers two choices on interest rate, either maintaining the 0.3% above base rate guarantee until 2012 (and currently paying 0.8%), or earning a 2.02% bonus on top of the 0.5% rate for six months (compare these to the Top Savings Accounts).
How will this money be protected?
Kaupthing used to have full UK registered protection, meaning if it went bust you'd get £50,000 per person back from the UK scheme. This has now changed to the same protection as ING Direct customers get.
This means in the event that ING Direct goes bust, 100% of the first €100,000 (around £91,000) will be guaranteed. However it's important to understand this is NOT protected by the UK scheme but by the Dutch Investor Protection Scheme, meaning it would have to be claimed from the Netherlands authorities.
Stories surfaced in September 2009 that financial ratings agency Moodys was considering downgrading ING Direct's safety rating (read The Sunday Times article), so be careful that you understand how you're protected, and stay within the limits.
Did you attempt to transfer cash out before it went bust?
There were initial problems for savers who had tried to transfer money out of Kaupthing around the time of its collapse. As far as we are aware, this is all now sorted, but if you are having problems, please let us know by emailing kaupthing@moneysavingexpert.com. For full details of what happened, read the forum thread and poll.
Icesave: Bank collapsed; FULL compensation due in November
Icesave, part of Icelandic institution Landsbanki, was declared in default on Tuesday 7 October and the Icelandic portion effectively nationalised (like Northern Rock was here), meaning savers had to claim compensation to get their savings back.
Unlike Kaupthing Edge, it had opted for ‘passport exemption’ with the UK compensation scheme, meaning if it went bust, the first €20,000 should have been paid by the Icelandic compensation scheme, with the remainder of the £50,000 from the UK scheme.
However, due to the solvency of Iceland as a country, doubts arose about whether the Icelandic protection scheme had enough cash to pay back UK savers. On Wed 8 Oct, the Chancellor Alastair Darling said:
"All Icesave savers' money, not just up to £50,000, will be protected, including interest"
All the money should now be paid back to savers, though if you're still having major problems, we'd like to hear about them, please email icesave@moneysavingexpert.com. Otherwise you can read the full claims process.
A.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.
The advantage of this is it can pull cash from more than just the affected sector (i.e. if an insurer went down, while other insurers must contribute first, above a set level banks would be asked too) so funds should be available.
In theory, this means should the worst happen and a bank goes out of business, the FSCS has the legal power to call in funds from major financial institutions to cover the compensation needed to repay the first £50,000 lost by every saver.
What if the FSCS didn’t have enough money?
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, so it's nowhere near enough for the big banks!
Thankfully, FSA documents also confirm...
"5.51 The Government will therefore include provision in the forthcoming legislation to allow the National Loans Fund to lend to the FSCS. These loans will have to be repaid, with interest charged at appropriate market rates, out of future levies on the industry, as well as from the share of recoveries from the estate of the failed bank that accrue to the FSCS."
Which in a nutshell means if the fund didn’t have enough cash, the Government will lend it the money, and it will then try and get it back from the insolvent bank’s assets and by putting a levy on the banks for years to pay it back. This has since happened; the FSCS money that was used to help push through the takeovers of Bradford & Bingley and Kaupthing was borrowed from the government and will be paid back in future years.
This wasn’t always the case though. Less than a year ago it seemed there was no back up plan. The first we heard of the Government's willingness to back the scheme up was actually due to a TV programme... Find out more.
A. The most important rule is to spread your cash around, doing that doesn't just mean more of your money is protected, it also follows the old fashioned "don't have all your eggs in one basket" rule.
The techniques you adopt depend on the amount of cash you want to save.
- Over £50,000. For those with bigger savings, in the unlikely event a bank or building society went bust, the golden rule is don’t put more than £50,000 in any one financial institution; thus spreading your savings around a number of accounts. This a perfectly sensible strategy; just check on the chart above to ensure that they genuinely are separate institutions.
- Very large amounts. For those with very large amounts of savings (for example a house sale) this could lead to lots of accounts, even if you've too much to stick to the £50,000 limit for each one, the general rule of not having all your eggs in one basket still works.
- Less than £50,000. If you've less than £50,000 there's no problem in terms of protection. Yet if a bank went bust and you were to have to claim compensation this takes time and meanwhile you wouldn't have access to any cash. So it is still worth considering having money split across more than one financial institution.
There are usually nine or ten very competitive accounts, meaning you can save well over £500,000 in perfect safety. To help, at least ten top accounts are included in the Top Paying Savings Accounts article, so pick the highest payer then work your way down. Plus any new best buys go in the weekly email.
It's also possible to get 100% safety on some accounts, though the rates are lower, see the 100% safe savings section below.
Other ways to keep your savings safe.
It’s easy to forget there are still some standard safe uses for savings that are risk free.
Repay your debts.
Most credit cards and loans cost a lot more in interest than you earn on your savings. So repay the debt with the savings and you’re quids in. See the Repay Debts with Savings guide.
Overpay on your mortgage.
Many mortgages let you pay off a bit a month, or even in big chunks. Paying off a mortgage, say at 6%, is a bit like earning that amount on savings after tax – as DECREASING your costs is similar to EARNING cash.
Plus, in a tough mortgage market, the less you borrow compared to the house’s value, the better deals are available to you. So paying off now may lead to a better deal at remortgage time. Full info including a special calculator in the Should I Pay off my Mortgage? guide
A. Yes, two; simply because they're both currently owned by HM government! All savings in Northern Rock and National Savings & Investments are 100% guaranteed. This does mean, if you've a lot of cash (well over the £50,000 amount) and the safety factor worries you, to put a portion of your cash in there for ultra safety is a reasonable, cautious strategy. Yet as the rates don't tend to be that good, be aware that by hedging for safety you're sacrificing interest.
National Savings and Investments (NS&I).
NS&I has always been a state-owned financial institution, meaning the Government has fully backed up any money in it. Whilst premium bonds are its most popular product, the average returns on them are quite poor and represent rubbish value for money (read Premium Bonds: Are they worth it?); its Direct ISA and Index-linked Savings are much better payers.
Northern Rock.
Northern Rock was nationalised in February 2008 following its brush with the credit crunch. Following that crisis, the Government stepped in to give a 100% guarantee on all ‘existing savings’ there, then extended it to new deposits too.
This means anyone saving with Northern Rock, whether from before the crisis, since it, or even if you took your money out and now re-deposit it, will get back your whole balance, plus interest that you’re owed and any money that you subsequently deposit there in the future.
The best rates available are 2.5% (inc 1% bonus for a year) with its online E-Saver, or if you are willing to lock the cash away for a year, its Fixed Rate Bond pays 3.75%. However, one of the terms of its nationalisation says it can't hold more than 1.5% of all UK deposits, and previously all accounts were withdrawn because it breached this limit. If it happens again, we will update this section.
Buy a tax certificate.
For those who are self employed, one place to put money safely is to pay your tax early. You can do this by buying a tax-certificate and you may earn taxable interest on it (see interest rates list). This system is best for those with larger tax bills, putting money aside that is likely to be due within the next year, by doing this you're effectively saving your cash with the government.
Rely on the Irish?
The Irish government has promised to protect all savers' money until 2010, and any UK accounts from Irish Banks, such as Anglo-Irish, get this protection. However, as this tops the £50,000 protection offered by the UK scheme, this means you are entirely reliant on the stability of the Irish government (read foreign bank protection).
This means the protection comes from a smaller European neighbour, and therefore you need to ask yourself how sure you are the Irish government can back it up, before relying on it the same way as UK protection.
The Bank of Ireland was described as 'shaky' by a Liberal Democrat MP (read full news story), plus due to stability issues, on 16 January 2009, Anglo Irish Bank was nationalised by the Irish government, then had €4 billion pumped into it in May 2009 (read Guardian article).
A. On 7 October 2008, the regulator the Financial Services Authority, increased the compensation limit from £35,000 to £50,000. This was done earlier than expected due to the global financial crisis, yet it doesn't mean the consultation is over.
The jury is still out on whether the limit needs to be raised to a higher level; the current consultation round closes in January 2009 and a statement is due out sometime later in the year (see FSA compensation review). Rumours arose in March 2009 that a 'temporary' £500,000 limit would be introduced, but this is far from confirmed (read full news story).
This isn't the only thing left to be decided either. How the money from insolvent banks is dealt with, the questions of extra protection for those who have short term large amounts (e.g. money from house sales), a new way of dealing with the issue of separate licences within one banking group, and the entire regime of bank rescue should be part of the consultation.
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