How safe are your savings

How safe are your savings? was a question being raised last year by the Financial Services Authority (FSA) in the UK as British people were investing £6bn in more than 170,000 Icelandic accounts. Nevertheless, just how stable was Iceland’s financial system? We now know the answer.

The UK has seen its own crop of financial disasters. In the wake of the high profile collapses of major banks such as Northern Rock and Bradford and Bingley, you could be forgiven for wondering whether you would be better off stashing your savings under the bed rather than putting them in the bank.

There is a government-sponsored compensation scheme in place, called the Financial Services Compensation Scheme(FSCS), that will cover losses incurred by savers with a failed financial institution. However, this only applies to institutions that are regulated by the FSA. This is why savers with the failed Christmas savings scheme Farepak lost all their money when the company went bust, as Farepak was not regulated by the FSA. The FSCS will also only cover up to £50,000 of any individual losses with a particular institution.

So, if you want your money to be safe, you have to put it into an FSA-approved savings scheme. All UK registered banks and building societies are regulated by the FSA. The FSCS savings scheme only covers money deposited into certain types of accounts, such as current accounts, saving accounts, small business accounts, cash ISAs, and credit union. It does not provide protection for hamper schemes, savings stamps, pension plans, or stocks and shares ISAs. The reason for this is that these schemes count as risk based investments, rather than savings accounts, and are subject to a completely different form of protection from the FSCS.

If the company that provides you with the investment scheme goes bust, this does not automatically mean that you lose everything. These firms invest your money in shares, which you still own even if the product provider goes bust. However, if the shares are in a company that has gone bust, you have no protection at all. In the event of the company you have invested with going bust, you are entitled to get the first £30,000 of your investment back, plus 90% of the next £20,000. If your pension or life assurance provider goes bust, then you will be entitled to receive the first £2,000 plus 90% of the rest from the FSCS.

So is it still safe to save your money with a bank or building society in the UK? The answer is an unequivocal yes, although if you have more than £50,000 in savings, it would be sensible to spread it around various firms and savings schemes, so that if anything should happen, you can get all or most of it back. Another advantage of spreading it around is that you can often receive cash incentives for opening a new account. For example, Alliance and Leicester currently offer an incentive of £100 for new current account customers, which you could then easily deposit in one their savings accounts to get you started. Take a look at their website to get more information about their savings accounts.

Most countries have somewhat similar ways in which savers are protected when saving with established financial institutions. In the US, the Federal Reserve provides Deposit Insurance, while in Canada, the Deposit Insurance Corporation has a similar mandate.

Related articles by Zemanta

• Icesave: act now or lose your savings (telegraph.co.uk)