The safest savings accounts

To keep your savings perfectly safe, you need to read this advice!

The big difference between saving and investing is that investing puts your capital at risk. In other words, not only are the returns from, say, shares or property not guaranteed, but you could lose some or all of your initial investment, too.

There’s no such thing as 100% safe

Saving, on the other hand, is much safer and predictable. You can sleep easy at night, knowing that your money is securely earning interest while you sleep. However, the spending power of your savings can be eroded by inflation - the rising cost of living - and by tax on your interest.

That said, there is no such thing as a 100%, cast-iron guarantee for savings covering every possible event. This is because, to a degree, the government acts as a backstop for all UK-registered savings institutions. As we’ve seen in the case of Iceland, even governments can fail under extreme financial stress.

Irish eyes aren’t smiling

At present, there are widespread fears about the ability of the PIIGS countries - Portugal, Ireland, Italy, Greece and Spain - to service their growing debts. The eurozone members considered to be in the deepest economic trouble have seen their sovereign debt (government bonds) fall in value, plus insuring against their default has become much more expensive.

In particular, the credit crunch and subsequent economic recession has put the Irish economy under huge stress. With property prices crashing, consumer spending slumping, and the unemployment rate almost tripling from 4.8% in December 2007 to 13.7% last month, Ireland is still on life support.

Thus, in order to increase confidence in its banks, the Irish government introduced an enhanced Deposit Guarantee Scheme. This superior savings safety-net covers 100% of the first €100,000 per saver per institution (that’s almost £87,000).

However, until 31 December 2010, all retail deposits are guaranteed by the Irish government. This extra protection has stopped weak banks such as Allied Irish Bank from experiencing a ‘run’ on their deposits similar to that seen at Northern Rock in September 2007. This blanket guarantee also extends to savings accounts with the Post Office, which offers savings accounts backed by Bank of Ireland.

Inflation is the enemy when it comes to your savings because it attacks real returns, and reduces the purchasing power of your cash.

The UK savings safety-net

In the UK, savings are protected by the Financial Services Compensation Scheme (FSCS). This guarantees 100% of the first £50,000 on deposit per saver per institution. Thus, up to £100,000 in a joint account would be covered. According to the FSCS, this limit is enough to fully protect 98% of British savers.

When it comes to what defines a ‘single institution’, things get complicated. Some banks are part of a larger group which operates under a single authorisation, whereas other banks may be authorised separately from their parent group.

In other words, there is no easy rule to discover whether a subsidiary of a big banking group has its own ‘Firm Reference Number’ (FRN), or whether it is covered by its parent group’s FRN. The easiest way to find out is to check this list produced by the Financial Services Authority (FSA).

In short, to enjoy the full protection of the FSCS, make sure that you don’t keep more than £50,000 in aggregate across all firms covered by the same FRN. Thus, a large sum may need to be spread across several different institutions.

Some banks have an implied guarantee

In addition to the FSCS, three banks have - in effect - an implied (but not explicit) government guarantee that all savings in these banks are 100% safe.

These three banks are Northern Rock (100% taxpayer-owned), Royal Bank of Scotland (84% taxpayer-owned) and Lloyds Banking Group (41% taxpayer-owned). At the peak of the financial crisis in late 2008, these banks were bailed out by the government and, as a result, have been partly or wholly nationalised.

Given that these three banks, to all intents and purposes, are ‘wards of the state’, it is highly unlikely that the coalition government would allow savers to lose a single penny were any of the three to suffer financial distress. (Indeed, Northern Rock was given an explicit 100% guarantee, but this ended on 24 May).

Hence, I regard deposits in these banks as being almost, but not quite, 100% government-guaranteed.

Only one bank has a 100% guarantee

Today, only one UK savings institution is backed by the ‘full faith and credit of the British government’. It is, of course, the government’s own piggy-bank, National Savings & Investments (NS&I).

NS&I offers a range of different savings accounts, some of which pay tax-free interest. Here are links to some of NS&I’s most popular accounts, all of which are 100% secure:

Premium Bonds- a monthly prize draw with a £1 million jackpot (for more information, read my recent article about Premium Bonds);
Fixed Interest Savings Certificates - these pay a fixed, tax-free interest rate over two or five years (but are not on sale at present);
Index-linked Savings Certificates - these pay tax-free interest linked to the Retail Prices Index measure of inflation (but are not on sale at present);
Direct ISA - a tax-free, easy-access savings account currently paying 2.50% AER;
Direct Saver - an everyday savings account which pays a taxable interest rate of 1.75% AER on £1+; and
Children's Bonus Bonds - a five-year bond paying a tax-free interest rate of 2.50% AER.

For easy reference, here’s an up-to-date list of interest rates for all NS&I products.

If you’ve borrowed from the same bank

Note that you could be in a sticky situation if you have a mortgage or other debt with the same bank where your savings are deposited. Were this bank to collapse, your savings would be offset against your mortgage debt, reducing your liability to the difference between the two.

In effect, this would leave you with the same net debt as before, although losing your savings could leave you in the lurch when it comes to paying the bills. Hence, it may be a good idea to keep some emergency savings with a bank unconnected to your mortgage lender.

Finally, always remember that any guarantee is only as solid as the financial strength of the organisation behind it. No-one can say what financial hurricanes may strike in the years to come, so it’s entirely up to you to keep your savings as safe as possible!

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