Are your savings protected?

The run on Northern Rock in 2007 put a question mark over how safe our savings really are. Although the government is quick to point out that not a single person has lost any money as a result of a British bank failing, in October 2008 it raised the deposit protection guarantee from £35,000 to £50,000.

At the same time, it is also considering proposals such as forcing banks to provide compensation upfront into a pre-paid fund, speeding up payments, and making compensation per brand rather than per bank. This would mean that, if a bank or building society collapsed, savers would receive their money back - up to £50,000 - within seven days.

The government is quick to point out that all British banks are solvent, and it would not allow any saver to lose money as a result of a firm going bust. In addition, the nationalisation of Bradford & Bingley saw it guarantee £4 billion of savers' money despite this not coming under the then £35,000 protection scheme.

So why has it raised the limit? And to what extend are our savings protected?

The current rules

Prior to Northern Rock’s collapse year, 100% of the first £2,000 of your savings were protected by the Financial Services Compensation Scheme (FSCS). After this, 90% of the next £33,000 was also protected.

On 1 October 2007, the government extended the protection limit so that 100% of the first £35,000 was guaranteed per bank, per customer.

Since 7 October 2008, this limit has stood at £50,000.

Currently, it takes about one month for the FSCS to pay out compensation, but the government wants to make the process speedier so that people potentially receive at least some of their money back within seven days. From December 2010, it will aim for all payouts to be within seven days.

To achieve this, banks and building societies may be required to create a pre-paid compensation fund.

If a bank were to fail, and you had more than £50,000 in an account or with a specific bank or building society, then you would not be able to claim a refund for all money over the threshold.

Savers with more than £50,000 are, therefore, recommended to spread this across as many different organisations as needed. You can find our how your bank is authorised by reading our guide to the UK's saving banks.


What about joint accounts?

The current rules, and those being proposed, cover people with joint bank accounts. This means that, should your provider fail, you would each be covered for up to £50,000, giving you a joint protection guarantee of up to £100,000 in the account.

Any money over this amount would not be protected by the FSCS, although the Treasury may well make an exception and guarantee this money in the event that your bank does fail.

... and trusts?

There are two types of trusts, discretionary trusts and bare trusts. Both are tax-efficient ways to put money or assets aside, often for children or grandchildren. Not only can trustees decide how much they receive and when, or indeed whether they receive it at all, they can help limit your inheritance tax liability too.

With a discretionary trust, should an institution go bust, the beneficiaries will only be entitled to a single claim at a maximum compensation level of £50,000. So if the discretionary trust had a deposit of £100,000 with five beneficiaries, they would only receive £10,000 in compensation each.

Bare trusts however, are different. Because bare trusts make it clear the assets are not for you, each beneficiary is eligible to claim for £50,000 worth of compensation. A bare trust worth £100,000 with five beneficiaries would therefore each receive £20,000.

... and SAYE schemes?

The FSCS has now confirmed that over two million Save As You Earn (SAYE) share plans are protected.

In a statement on 30 October, the FSCS announced: "Money deposited via a SAYE scheme that is run in the standard way will be protected in the same circumstances as any other deposit will be.

"This is the case regardless of whether the scheme holds the deposit in individual accounts for each employee, or in one common scheme account, provided that the scheme holds full details of the individual depositors and the proportion of the money to which they are entitled.

"In particular, it should be noted that any amount deposited with a bank or building society via a SAYE scheme counts towards an individual’s compensation limit with that bank or building society".

An SAYE share plan involves employees saving a fixed monthly amount of between £5 and £250 over a three, five or seven year period. At the end of the period the employee then decides whether to buy shares in their employer with the money saved or have their savings returned with a cash bonus.

Are deposits with foreign banks protected?

In recent years a number of foreign banks have created UK operations offering savings accounts Brits. The presence has not gone unnoticed, especially as several have dominated the best-buy tables for saving products with attractive headline rates.

Landsbanki launched a savings account provider called Icesave into the UK in 2006, while Kaupthing Bank, Iceland’s largest bank, has been in the UK since 2005 with a savings account provider launched earlier this year called Kaupthing Edge.

Both these firms have now been closed down by the authorities with varying impact on savers. To find out more, read our article on Icelandic-owned savings banks.

Another popular savings bank is Dutch-owned ING Direct. This is part of the passport scheme, which means part of your savings are covered by the deposit protection scheme in Holland and the remainder (up to £50,000) by the FSCS.

One measure being looked at by the government, is changing the rules so savers only have to claim once even if they are with a foreign-owned bank. The FSCS would then claim back the extra money itself from the specific countries own compensation fund.

More than one account with a bank?

The current – and proposed – compensation scheme applies per person, per bank. So, if you have two accounts with a bank, then you would still only be able to claim back the first £50,000. Any money over this amount would be lost.

The problem is, many banks are owned by the same parents and are authorised by the FSA under their group name.

Because the banks are authorised by the FSA under their parent group, they effectively count as one when it comes to compensation.

However, other groups of banks have separate authorisation – such as the Royal Bank of Scotland and NatWest, which are both part of the RBS group.

How protected is your bank?

Bear in mind that one proposal is to change the rules so customers are covered per brand rather than per bank. This would get rid of any concerns regarding banking groups and make it easier for people to know how safe their money really is.

Mortgage debt?

New rules announced in July 2009 mean that savings will be ring-fenced from any debt with the same firm. The new rules mean the customer's savings will be protected to the limit of £50,000 and not used to offset loans.

Previously, tthe first £50,000 of savers’ money was covered by the FSCS minus any debt also held with the firm in question – such as an overdraft, a loan or mortgage. This meant that if a firm was to fail, savers would see outstanding debt subtracted from their savings.