Keeping savings safe

Just as the UK raised its Financial Services Compensation Scheme (FSCS) limit from £35,000 to £50,000 in an attempt to reassure savers, Iceland dropped the bombshell that its banking system could no longer cope under the strain of the credit crunch.

It is Icelandic bank Landsbanki's failure that has highlighted the issue of the safety of savings, despite the FSCS, as hundreds of thousands of Brits with savings in Landsbanki's UK internet bank, Icesave, faced the prospect of losing their savings.

Fortunately, the UK Government has agreed to back all UK depositors with cash in Icesave savings accounts (but not councils and organisations), as the Icelandic Government failed to live up to its compensation agreement to UK savers. But how safe are Brits' savings, even with the UK compensation limit being raised to £50,000?

One major issue with the FSCS is that a saver can only claim the first £50,000 within a financial institution, not per account. Banks that share the same Financial Services Authority (FSA) registration number count as one financial institution.

So, if a single saver has £50,000 in an Abbey savings account and £50,000 in a Cahoot savings account, the FSCS will only cover the first £50,000 because the banks share the same FSA registration number, as they are part of the same overall company. On the other hand, even though Scottish Widows Bank is owned by Lloyds TSB, as they have separate FSA registration, they are covered separately by the FSCS.

And, as savers become aware of this, Fairinvestment.co.uk has found that building society savings accounts may offer a safer haven for deposits than banks. This is because, with few exceptions, building societies are unlikely to be part of a bigger financial group and so will have an exclusive FSA registration number.

Commenting, chartered financial planner at Fairinvestment.co.uk, Sharon Bratley, said: "Building society savings accounts may offer more security for large depositors as they tend to be single entities as building societies are owned by the members rather than shareholders.

"For this reason, building societies may be safer for savers with more than £50,000 to invest. There is little danger by having money in separate building society accounts that investors will be caught out by seemingly separate companies sharing an FSA registration number. Anything above £50,000 in any of the banks above that share a registration number is unlikely to be recovered following failure."

However, there is an exception to this rule as joint accounts are covered for double the compensation limit in order to cover both depositors.

Commenting, Mrs Bratley added: "For couples who are keen to stay loyal to one particular savings provider, it may be worth opening a joint account as that way up to £100,000 will be protected by the FSCS."

One other point to remember about the FSCS is that any debts owed to the same financial institution that savings are with will usually be taken off the value of savings that is compensated. Sharon Bratley added: "These drawbacks are worth keeping in mind when choosing a savings provider, especially given the current economic climate. If you have a loan with one provider it may be worth opening a savings account with a separate financial institution to avoid being caught out."