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.
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.
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.
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.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Save as you earn
A tax-efficient cash saving scheme that lets employees save towards buying shares in the company they work for at a discounted price. At the end of a specified term, participating employees have the option to buy shares in the company or take the savings in cash. The share option works like a warrant, with a special share price set (known as the option price). If the company’s shares have increased in value when the term is finished, employees can buy the shares at the option price. If the shares are worth less than the option price, the employee simply takes the cash.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.