How safe are your savings?
We've had a turbulent few weeks in the banks and building societies recently. Not surprisingly, many people are wondering whether they would be better off just drawing out their savings and putting them under the mattress!
But the answer is 'no you wouldn't'. Right now, according to an update to the Financial Services Compensation Scheme (FSCS) the first £35,000 of your savings in a British bank or building society is covered 100 per cent. If the bank goes bust you will get the whole lot back. That's an improvement on the way it was before the Northern Rock crisis when only the first £2,000 was totally covered, then 90 per cent of the next £33,000.
Of course, many people have more than this in savings, which is why so many queued all day outside Northern Rock outlets when the first sign of problems arose. People whose life savings amounted to much more than £35,000 were worried, even though the Government and the Bank of England gave reassurances that they wouldn't lose a penny.
Because people were clearly not impressed by the assurances they were given, the Government now says it may increase the guaranteed limit to £100,000 and bring in a more American-style compensation scheme which would mean that savers would get their money back within a few days of a bank's collapse. At the moment it could be a long and drawn-out process to get your savings returned.
Spread your savings
However, although it is possible that the Government will increase the guaranteed limit, it will take some time to make it law. If you're worried, and you have more than £35,000 in your savings, the best and safest option is to spread your savings in amounts of £35,000 or under across various savings accounts.
If you do decide to spread your money, make sure that the accounts are with different companies, not just different named banks. The guarantee only covers you per company and as all the big banks now own various brands (Bank of Scotland, Halifax and Birmingham Midshires, for example, are all part of the same company) you need to know that each account is owned by a different company. You can find out which company owns which bank by looking at the information on their websites.
Look at alternatives
You could try some of the alternatives on the market. One of the very safest financial institutions is National Savings & Investments (NS&I). NS&I has always been totally backed by the Treasury which has always made it very safe but has also meant that its savings, though tax-free, give lower interest rates. However, they have a good index-linked savings certificate which gives a decent return. The three and five-year plans are set at inflation (according to the Retail Prices Index that is currently 4.1 per cent) plus 1.35 per cent. So if you are a top-rate tax payer (you pay 40 per cent tax) then you save a lot on the tax you don't pay on this account, which means that you actually get the equivalent of 9.08 per cent from it.
Another alternative to try (probably as well as savings in a traditional bank or building society) is to open an account with your local credit union. There aren't many credit unions in Britain, mainly because of restrictive financial rules in the past, but they are big in America, Ireland and several other countries. They're particularly good for people on low incomes who want to save or borrow small amounts but many are getting bigger and they now offer a range of services including current accounts, Christmas savings, mortgages, savings accounts, children's accounts, mini cash ISAs, and fixed-term savings. Some credit unions offer the Argos card, which gives an extra five per cent on your savings, when they are spent at Argos.
They are usually thought of as organisations for people on low incomes but, if you're a saver, a recent Which? magazine report showed that their rates of return are often higher than those offered by the main banks. It's also pleasant to know that profits on your transactions aren't being pocketed by City fat cats. To find out if there's a credit union near you or one that you could join, go to www.abcul.org.uk. Here, you can also find out how to set up your own credit union and contact other like-minded people who also want to set one up in your area.
Another possibility is to put you money into gilts. These are also known as Government Bonds and, basically, they are loans to the Government. Lending money to the Government is generally considered to be a pretty safe bet which means that the return on gilts, though nice and secure, is not very high (many are about the same as savings rates). Also, because they are a type of bond, you need to agree to tie up your money for a year or more. You can invest in gilts through banks or building societies or through an Independent Financial Adviser.
For more information, visit www.moneymagpie.com
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