Kevin Mountford, Head of Savings
The near collapse of Bear Stearns, an 85-year-old investment bank that survived the Wall Street Crash of 1929, caused a wave of panic among investors around the world. More than £14billion was wiped off the value of Britain's main high street banks as share prices plunged last Monday amid fears that the financial crisis could claim further casualties.
Britain's banks rushed to borrow £23billion in emergency funds from the Bank of England as the liquidity in the wholesale markets dried up. The continuing turmoil does nothing to calm the fear of the nation's savers, many of whom are worried that last year's run on Northern Rock will prove not to be an isolated event.
There has been a lot of press speculation recently about the stability of Iceland's banks and this has caused concern among many savers as two Icelandic providers, Kaupthing Edge and Icesave, operate in the UK savings market. Moneysupermarket's editor, Clare Francis, interviewed Ashley Whittaker, head of savings at Kaupthing Edge, to ask him whether these fears are justified.
Good news for savers
Borrowers are bearing the brunt of the credit crisis. As a result of the shortage of funds on the wholesale banking markets mortgage and loan rates are rising and providers are being more choosy about who they will lend to.
Savers on the other hand, seem to be the main beneficiaries. Institutions are looking to reduce their dependence on wholesale funding and attract more money in through retail deposit accounts. Consequently, savers are enjoying some of the best rates for years.
Bank rate, the country's official rate of interest, is 5.25%, yet the best easy access savings accounts are paying 6.50%. If you are willing to lock your money away you can earn even more. Kaupthing Edge's one-year fixed rate bond is paying 6.86%.
Is your money safe?
There is a culture of fear among savers who are worried about placing their money into a bank following the events at Northern Rock and Bear Stearns. However, as long as you're savvy with your cash there's little to be concerned about.
The Financial Services Compensation Scheme (FSCS) regulates financial institutions such as banks or building societies - it does not offer protection to savings stamps or hamper schemes, such as Farepak, which famously suffered a dramatic collapse.
The chances of a bank going bust are extremely unlikely, but if it were to happen, the FSCS guarantees the first £35,000 of your savings. If you have cash in a joint account the first £70,000 is protected.
You may therefore assume that as long as you keep no more than £35,000 in one account you will be protected - however, there is a catch.
The protection does not apply per bank account - it applies per financial institution. So if you've got more than £35,000 saved across several accounts from the same bank, you won't receive any extra protection - you need to spread your money around.
There is one notable exception, however. In a bid to stop the run on Northern Rock, the Government stepped in to guarantee all the money held by savers in Northern Rock accounts. That 100% protection still stands and the bank has said that three months' notice will be given if that guarantee is to change. Northern Rock is therefore the safest place to hold savings at the present time.
So what are the financial institutions?
The FSCS definition is that you get protection for each company independently registered with the Financial Services Authority (FSA) - check the FSA website if you're unsure who owns each provider so you can spread your money accordingly.
Here's a brief guide to which savings providers count as one financial institution under the FSCS definition - each group receives a single £35,000 savings shield:
- Abbey National: Abbey and Cahoot.
- HBOS: Halifax, Bank of Scotland, Intelligent Finance, Birmingham Midshires, the AA, Saga.
- Post Office & Bank of Ireland Group: Bank of Ireland, the Post Office.
- HSBC Bank: First Direct, HSBC.
- Co-operative: Co-operative Bank, Smile.
- National Australia Bank Group: Yorkshire Bank, Clydesdale Bank.
- RBS: Royal Bank of Scotland, Direct Line.
RBS is structured slightly differently from the likes of HBOS. Natwest and Tesco Personal Finance are part of the RBS group, but they are registered separately with the FSA so you get the full £35,000 protection with each brand.
So where should you put your money?
The good news is that the top five savings deals in the UK are all provided by different financial institutions - Alliance & Leicester's eSaver and Kaupthing Edge's Instant Access account both pay 6.50%, Firstsave First Bank of Nigeria's Easy Access account has a rate of 6.26% and the Abbey eSaver direct and Northern Rock's Tracker Online are both paying 6.25%.
There are a few caveats with some of these deals: A&L's eSaver carries withdrawal restrictions - with the exception of the month of July no interest is earned during any month in which a withdrawal is made. And the Abbey and Northern Rock accounts both include 12-month bonuses.
If you want a catch-free account, other alternatives include ICICI's Hisave account at 6.16% and Bradford & Bingley's Internet Saver 2 which is paying 6.15%.
The Chancellor is looking into whether the protection offered by the FSCS should be extended to cover more than the first £35,000 held with a single financial institution. In the meantime, if your savings total more than that, spread your money around. As we have highlighted you can achieve peace of mind by doing this without having to sacrifice the interest you receive. Use a comparison tool to gain an overview of all the deals available.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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