Failure – Unprotected savings?

How well are your savings protected? Surprisingly, not as well as you might think.

Before the near-demise of Northern Rock, few savers realised that only the first £33,000 of their cash was protected. Since then, savings protection has been increased to £85,000 under the Financial Services Compensation Scheme (FSCS). But only for each authorised bank “brand”.

This can be confusing since the rules can vary between banks. So it’s vital you take the time to do your homework on the FSA website (www.fsa.gov.uk) and doublecheck your own accounts.
Imagine you hold several accounts – together worth £200,000 – with Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance. You might think these are four separately protected banks. In fact, you would only be protected up to a maximum of £85,000 as they are all authorised under the single HBOS brand.

On the other hand, although the Royal Bank of Scotland owns NatWest the two banks are separately authorised by the FSA so that, if you held £85,000 with each bank, your total savings of £170,000 would be fully protected.

Foreign banks

The majority of foreign banks operating in the UK have chosen to be registered so that they are covered by the FSCS compensation scheme in exactly the same way as UK banks.

However, some European banks have opted for a different type of protection called the Passport scheme. Here, the bank will first rely on the home country’s compensation scheme which might, in fact, be more generous than in the UK. For example, both the nationalised Anglo-Irish bank in Ireland and ING Direct in Holland have offered greater levels of protection, respectively guaranteeing all your savings and up to 100,000 euros compensation.

It’s worth noting that banks from outside the EU (European Economic Area) are unable to take part in this “passport” scheme and so instead must offer the £85,000 FSCS compensation.

If you’re unsure, you can easily check a bank’s compensation status: simply type “bank listings” into the FSA website (www.fsa.gov.uk), click on the most recent date, and it will give you a giant up-to-date list. In a nutshell, and to spare you the horrible language, all banks shown in the “Banks incorporated in the United Kingdom” category are fully covered by the FSCS.

Those institutions listed under the snappy title “Banks incorporated outside the EEA authorised to accept deposits through a branch in the UK” only have their home compensation scheme.

Withdrawal from savings compensation scheme

There is nothing to prevent an institution from pulling out of the FSCS at any time. If you decided to take out a fixed-term savings account for a period of one to 12 months and, during that time, the institution withdrew from the FSCS, your savings could be left unprotected.

If you were worried enough to want to move your cash in such circumstances, you might well suffer a penalty, or even be prevented by the account’s terms from doing so.

What about the Pension Protection Fund (PPF)?

The PPF was established to pay pensions to those who lose their retirement savings when their company goes bust with the pension scheme in deficit.

In effect, it’s funded by a levy on company pension schemes. However, when the Government established the PPF, it did not insist on participating schemes paying a levy based on risk – this would have seen schemes which pose the greatest risk of collapse paying the most and vice versa. As a result, the PPF could become vulnerable in the current economic downturn if thousands of workers turn to the scheme for help.

Today, if the PPF has insufficient funds to pay pensions at the current top level of around £28,000 p.a. – the maximum payable if a company goes bust, allowing you 90% of the pension you would have received, up to £28,000 a year – it has the right to reduce pensions paid to members of insolvent schemes in the future.

State pension “claw back”

We all pay National Insurance Contributions throughout our working lives in order to build up entitlement to the basic state pension. But even this is not sacred. Some final salary schemes deduct the value of your state pension from your company pension you receive in retirement.

This underhand practice is known as state pension “claw back” and, like its name, is an ugly practice which should be instantly scrapped. Few workers are aware of it, until, of course, it is far too late to do anything about it.

Banks bailed out by building societies

Building societies are mutual bodies owned by their savers and borrowers and are therefore run for the benefit of their members. But since the onset of the credit crunch, they are being forced to help pay for the bail-out of the banks. Even though building societies did not contribute to the near-collapse of the banking system, they face high levies to pay for clearing up the mess created by the excessive risks taken by the banks.

Adrian Coles, director general of the BSA, says: “Building societies feel very strongly that they are footing a disproportionately high share of the bill for the failed banks. Societies have higher levels of retail funding than banks and are not profit-maximising, so the levies hit them harder than their plc counterparts.”

Protection for savings in investments

If you have put money into an investment fund and the fund manager goes under, you will only get back a slice of what you’ve put in, currently the first £30,000 of any investment and 90% of the next £20,000. So a maximum of £48,000 is protected, but no more.

Cash paid into personal pensions and life assurance products falls into a separate “long-term insurance” category for compensation if the  investment provider goes belly up. In this unfortunate circumstance, your first £2,000 is fully covered and 90% of everything else you invested.

As for money in SIPPs, the protection for your cash depends entirely on how you decide to use it. However, it’s earmarked to be kept safe from the SIPP provider itself so, if the company goes under, your money is kept safe.

So say your SIPP put money into investments such as stockmarket funds or other investments: here, the first £30,000 is covered plus 90% of the next £20,000 (again, a £48,000 total).

But if you hold your SIPP money in cash, for safety (as many do), then you’ll benefit from the standard £50,000 protection. To find out which bank your SIPP cash is with (in order to see if it might clash with protection limits with ordinary savings held at the same bank), just ask your SIPP provider