How well do you think your savings are protected? You’d be surprised by the answer: not as well as you probably think.
Ever since the collapse of Northern Rock, millions of UK savers have been worried about the rock-solid safety of their savings and quite rightly so.
Before the near-demise of the north-eastern bank, few savers realised that only the first £33,000 of their cash was protected. Since then, savings protection has at least been increased to £50,000 under the Financial Services Compensation Scheme (FSCS)…. but only per authorised bank ‘brand’.
This can be confusing since the rules can vary between banks so it’s vital you take the time out to do your homework on the FSA website (www.fsa.gov.uk) and doublecheck for your own accounts.
Imagine you hold several accounts – let’s say, all together, they’re worth £200,000 – with Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance. It may be four banks but only a maximum of £50,000 will be protected because all of them are authorised under the single HBOS brand.
Yet, elsewhere, Royal Bank of Scotland owns NatWest but the two banks are separately authorised by the FSA….
So if you held £50,000 with each bank, your total savings of £100,000 would be fully protected. However, it’s still the case that any savings in excess of the £50,000 safety threshold would not be covered.
Watch out, though, with some foreign banks that operate in the UK.
Happily, in the majority of cases, the way they’ve chosen to be registered means you’re covered in precisely the same way as UK banks by the FSCS compensation scheme, so the £50,000 protection stands as normal.
However, some European banks have decided to go for a slightly different type of protection called the Passport scheme. Here, the bank will first rely on the home country’s compensation scheme but – in fact – it can 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 have to offer the full £50,000 FSCS compensation.
If you’re unsure, you can easily check out 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’ll 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
If that were not worrying enough, it gets worse. How? There is nothing to prevent an institution from pulling out of the FSCS at any time. For example, let’s say you decided to take out a fixed-term savings accounts for a period of 1 to 12 months and your institution then withdrew from the FSCS: your savings could be left unprotected.
And if you were – understandably – desperate enough to move your cash in such dire circumstances, you might well suffer a penalty for moving your funds elsewhere – or even be prevented from doing so by the institution you were saving with.
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 sadly in deficit.
In effect, it’s funded by a levy on company pension schemes but when the Government established the PPF, it did not insist on participating schemes paying a levy based on its risk – this would have seen schemes which pose the greatest risk of collapse paying the most and vice versa.
As a result, this sheer lack of risk-based funding means that 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 pa – the maximum payable if a company goes bust, allowing you to 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 have the temerity to 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, it is an ugly practice which should be instantly scrapped. Few workers are aware of it, until, of course, it is far too late.
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.”
And what about protection for savings in investments?
You may well think that cash savings are a special case and that everything else you plough your money into is fully protected. Sadly, that isn’t the case…
If you’ve put money into an investment fund and unfortunately the fund manager running your cash goes under, you’ll only get back a slice of what you’ve put in. As it stands, you’d currently get the first £30,000 of any investment back, in addition to 90% of the next £20,000. That leaves you with a total of £48,000 – but no more.
Cash paid into personal pensions and life assurance products falls into a separate ‘long-term insurance’ category for compensation if the provider behind the investment goes belly up. In this unfortunate incidence, your first £2,000 is fully covered followed by 90% of everything else you’ve got invested.
As for money in SIPPs, the protection you get 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