How safe are your savings in the credit crunch?

It is a good time to save, provided you're confident your money will still be there when you want it back. Interest rates on savings accounts have never been better for years, albeit hedged with restrictions on some of the highest earning accounts, as banks and building societies compete for your spare cash.

The freezing up of international money markets and the consequent high cost of borrowing for banks has resulted in Joe Public being targeted for savings deposits to boost the liquidity of financial institutions.

The lure of dazzling interest rates is difficult to resist if you have a chunk of money at your disposal. For instance, that deposit for a house purchase which has been postponed because of problems in obtaining the right mortgage (and the hope that house prices will plummet further) will surely be safer stashed in a deposit account rather than under the mattress.

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That savings deposit will earn you an excellent level of interest. But you have to trust it will be safer in that granite and marble mausoleum at the end of the high street instead of in your battered biscuit tin. The Northern Rock debacle and subsequent rumours of the financial precariousness of other 'big name' institutions do not exactly inspire the utmost faith in the probity of the savings market.

Spread the savings compensation load

Supposing there is a real threat of your money disappearing into a banking black hole; how secure then is the current regulatory safety net?

Will you get it all back and do you need to buy a holdall to carry away all those notes or would you be prepared to trust a cheque refund?

The Financial Services Compensation Scheme (FSCS) only gives protection for the return of up to £35,000 of savings per person (£70,000 for a joint account) in the (deemed unlikely) event of a UK regulated bank or building society going belly-up.

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Savings Rule No. 1: A lesson to be learned here is never to put more than £35,000 into any one savings account; if you can save or have saved more than this amount then spread your accounts around.

There are other glitches to be aware of. The FSCS protects savers with companies or institutions regulated by the Financial Services Authority (FSA), but different registration methods used by banks with the FSCS can result in anomalies in the level of savings protection.

With some banking groups e.g. Royal Bank of Scotland, savings brands are registered separately, so both your RBS and NatWest accounts, for example, would be covered for up to £35,000.

On the other hand HBOS's single registration with the FSCS means all its savings brands come under the one protective umbrella: you might have saved £35,000 with both Halifax and Saga, say, but you will only be compensated the once.

Savings Rule No. 2: Check out how your savings accounts are spread across which financial institutions and ensure you do not exceed the protection limits with one institution.

Banks outside the UK could swallow your hard-earned savings too and claiming compensation in the event of a foreign bank going bust could be tortuous. You may have to chase a chunk of your money from its host country if the foreign bank, say an Irish or Icelandic one, has headquarters within the European Economic Area (EEA).

Banks from outside the EEA, for instance Nigeria's FirstSave, must be fully registered with the FSCS, which would provide up to the full £35,000 of protection in the event of failure, but in the case of an Icelandic bank-bust that country's compensation scheme would have to refund part of your losses.

Keep the taxman's hands off your savings! Find the Cash ISA that is right for you.

14 July 2008 © Moneyextra.com

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