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Martin Lewis: Protect your cash
11:58am Saturday 29th January 2011 in Shoptalk
New EU rules mean the way your money is protected in a bank has changed.
ARE your savings safe? Well, they’re safer than last year anyway. Then the Government only guaranteed £50,000 per person per institution, now it’s £85,000. Yet don’t think “I’m fine then”, even if you’ve smaller amounts. There are more clauses than Christmas – so you could be less covered than you think.
My aim is to give you a savings safety makeover, based on the new rules. On December 31, the UK was brought into line with Europe, where the limit is 100,000 euros. The £85,000 allowance was fixed based on the exchange rate then, but should remain the same unless there are massive changes.
Before Northern Rock, Merrill Lynch, Bradford and Bingley, the Icelandic banks and others, savings safety was something barely thought of. It’s now an important question for anyone with an account. Yet solvency is a nightmare to judge, so my focus is always on how much protection you’ve got.
Here’s a Q&A:
Is money safer under the mattress?
Absolutely not. Even the best home insurance policies will only pay out for £1,000 of cash if you get burgled. If you put it in a savings account, the Government-backed Financial Services Compensation Scheme (FSCS) will, in most cases, compensate you up to £85,000.
Are all savings schemes protected?
No. It has to be a fully UK-regulated financial institution, which primarily means banks, building societies and credit unions. That means supermarket savings schemes, Christmas hamper schemes or many others don’t have this crucial guarantee. There may be trade bodies promising that they’ll give you cash back, but that isn’t close to the surety of government backing.
Is it per account or per bank?
Neither. Rather confusingly, it’s “per institution”, not per bank and there’s no common sense rule. It’s all about each bank’s licence with the Financial Services Authority. Sister banks Halifax and Bank of Scotland share a licence, so no matter how many accounts and how much money you have with these two, only the first £85,000 is protected. Yet other sister banks NatWest and RBS have separate licences, meaning up to £85,000 with each of them would be protected.
To see who your bank is linked with go to moneysavingexpert.com/safesavings.
Am I safe with money in a foreign bank?
This is where it gets tricky. To be protected by the UK Government the bank needs to be a fully UK-regulated bank. Yet some EU banks are allowed to rely on their home country’s protection rather than the UK’s.
For example, ING Direct depends on the Dutch government to pay out, while Anglo Irish savers rely on the Irish scheme. That means in the relatively unlikely event they went bust, you would be relying on a government you don’t vote for to pay out.
As we’ve seen in the past with the Icelandic banks, the UK Government can step in, but there’s no guarantee it will do so again.
Don’t think all foreign banks aren’t safe though. Most do have the full regulation. Indian- owned banks like ICICI or even Nigeria’s First Save needed full UK protection just to open here, because they’re non EU. Even EU banks like Santander also choose to have the full UK scheme.
And don’t always think “foreign” is obvious.
Until November last year even Post Office Savings didn’t have full UK backing as it was part of the Bank of Ireland (that’s now changed and it’s fully UK guaranteed).
A full list of foreign banks can be found on moneysavingexpert.com/foreignsavings
What about money in merged building societies?
This has all just changed. Until this year, money you had in some building societies before they merged, like the mega-combined Nationwide, Derbyshire, Cheshire and Dunfermline were covered up to £50,000 in each.
But now they have just one shared £85,000 protection between them.
The same’s true of other groups: Yorkshire, Chelsea and Barnsley; Skipton and Scarbororgh; the Co-op and Britannia; and, finally, Coventry and Stroud & Swindon.
How do I keep my cash 100 per cent safe?
Previously I’ve suggested savers big and small consider spreading them between different protected institutions, as even if you’ve got less than the limit, if a bank went bust you’d be without access to your cash for a time.
Now the FSCS says it would aim to make payments within seven calendar days of a bank or building society failing, and the remainder within 20 working days, which lessens that risk.
But the golden rule for those with big savings, whether it is due to retirement or perhaps money from a house sale, is still to spread each £85,000 around different institutions, so that you get 100 per cent protection.
The new cap means you’ll need fewer accounts to do this. If you have £160,000, you only need accounts with two institutions to be safe rather than the four accounts you would have needed under the old limit of £50,000.
This is good news. Fewer accounts mean you can better focus your money on where it earns you more interest. After all, while protection is important, the biggest problem most savers face these days is the historically low 0.5 per cent base rate.
Interest rates are a pittance, but with hard work it’s possible to get nearly three per cent in a basic savings accounts or a cash ISA if you are prepared to lock your money away for some time. Full details at moneysavingexpert.com