Fortunately, most Heritable and Kaupthing customers have had their savings rescued after ING, the Dutch banking giant, bought £3billion of deposits. These people's accounts have now been transferred to ING Direct, the bank's UK savings arm. Icesave's 300,000 customers haven't been so lucky, nor have Heritable or Kaupthing customers whose accounts aren't internet accounts, but they have been told by the Government that they will not lose any money as a result of the Icelandic crisis: they can claim up to £50,000 through the Financial Services Compensation Scheme (FSCS) and those with more than that in their accounts will have the surplus refunded by the Treasury. (For more information on this read our article 'Savings confusion - Q&A')
However, some savers are still in limbo, facing the prospect that they could have lost thousands of pounds. These are the people who invested in offshore accounts with the Icelandic institutions. The FSCS does not cover the Channel Islands so they cannot claim compensation through the authorities there, and the Government has not yet confirmed whether or not the extended protection it has given Icesave, Kaupthing Edge and Heritable customers will also apply to those with offshore accounts.
This is a sobering thought, even if you have not been directly affected by the crisis in Iceland, it is time to ensure your savings are as safe as possible.
What protection do I have?
Under the terms of the FSCS the first £50,000 (£100,000 for joint accounts) invested with a single institution registered with the Financial Services Authority (FSA), the City regulator, is totally guaranteed. The Government has given extra protection to those with money in Icesave, Heritable Bank and Kaupthing Edge but it has stopped short of announcing a formal guarantee that retail savers will have all of their savings protected.
Because the Government has given total protection to these savers, it seems unlikely that it wouldn't give the same guarantee to others, in the event of another provider going under. However, it is a potentially dangerous assumption to make, particularly as, with a bit of planning, even those with significantly more than £50,000 in cash savings, can protect all their money.
The key is diversification: you need to spread your money around between different institutions so that you benefit from the £50,000 guarantee with each.
You do have to be a bit careful when doing this because some savings providers are part of a bigger financial group which shares one registration with the FSA. HBOS is a perfect example. It has a number of savings brands: Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance. It also runs the savings accounts for The AA and Saga. However, you will get no benefit by splitting your savings between these providers as they all share the same HBOS registration with the FSA so only £50,000 is protected.
That said, there are plenty of providers to choose from which are registered separately with the FSA, and Clare Francis' article 'Who owns who' provides a list of institutions and what name they're registered under, making it easy to ensure you don't get caught out by investing with more than one firm that is part of the same group.
Best return
With interest rates having been cut by 0.5 percentage points last week savers should be looking for the highest rates possible and the good news is that the savings market looks set to remain highly competitive because banks and building societies are still desperate for our money due to the funding shortage on the wholesale financial markets.
The highest rates are available on fixed rate bonds, so these are worth considering if you have money you can afford to lock away. ICICI Bank's HiSave Fixed Rate Bond is paying 7.20% and that rate is fixed for a year. Although ICICI is foreign-owned, it is fully registered with the FSA and is signed up to the FSCS. Another option is Halifax's Web Saver which is paying 7.0%.
If you'd prefer to stick with the flexibility provided by easy access accounts, Alliance & Leicester's eSaver Issue 2 has the leading rate at 6.60%. There is a catch with this account though: you do not earn interest in any month you make a withdrawal, with the exception of July. It's worth noting, that Alliance & Leicester, Abbey and Bradford & Bingley are all now part of the Spanish banking group, Santander.
Other leading easy access accounts include West Bromwich building society's Stratus no-notice account which has a rate of 6.56%, Birmingham Midshire's e-Saver Account (Issue 2) at 6.52% and Bradford & Bingley's Internet Saver 3 which is paying 6.51%.
There are a number of other products, all of which pay 6.50%: ING Direct's Savings Account, Tesco Personal Finance's Internet Saver, the Abbey eSaver Direct, Capital One's Bonus Savings account and Natwest's e-Savings account. However, all of these products have introductory bonuses so the rates become much less competitive after a year. The Natwest account for example, includes a 2.09 percentage point gross bonus, so the rate drops to 4.30% after 12 months.
The other thing to note is that none of these rates have changed since Bank rate was cut to 4.5% so they may be reduced in the coming weeks.
Safety over rate
Because of the financial crisis a huge number of savers have shown they would prefer to sacrifice rate in return for greater security. The main beneficiaries of this flight to safety have been National Savings & Investments and Northern Rock, both of which are backed by the Government and offer unlimited protection.
However, Northern Rock has withdrawn its leading rates to deter savers from investing with the bank because under the terms of its nationalisation it is not allowed to hold more than 1.5% of the country's deposit book. NS&I also seems to be trying to put people off from investing with it. It cut the rates on many of its accounts, and that was before the Bank of England half point cut, so they could fall again in the coming weeks. The rate on its Cash Isa, for example, was reduced from 4.6% to 4.4%. The leading cash Isas are paying more than 6%, illustrating the trade off that people are making as they seek assurance.
Demand has also surged for accounts from Irish providers such as Anglo Irish and Bank of Ireland following the Irish Government's announcement that it will guarantee all deposits from retail savers until September 28 2010. Anglo-Irish Bank's one-year bond is paying 7.05%, while its Easy Access Account Issue 2 has a rate of 6.40%. Accounts from the Post Office are also proving popular as they are provided by Bank of Ireland. The Post Office's Instant Saver is paying 5.75%, while its Isa has a competitive rate of 6.25%. However, there are concerns about the value of the Irish Government's pledge because of doubts that it could actually afford to refund all savings were the country's banking system to implode.
It is not only providers offering total protection that are attracting cash from the nervous, banking stalwarts such as HSBC and ING Direct are also seeing demand for products increase mainly because their size and the amount of money they have on deposit is massive. The perception is that such giants are less likely to go bust than their smaller counterparts. As mentioned above, ING Direct's Savings Account is paying an attractive 6.50% for the first year, although the rate drops to a less impressive 4.75% thereafter. HSBC's Online Bonus Saver pays 5.25%, although this includes a 2.47% bonus which you only receive if no withdrawals are made during the month. While this account isn't spectacular, HSBC does offer one of the leading cash Isas. Its Cash e-Isa is paying 6.25%.
While it is totally understandable that savers are worried and are seeking safer homes for their money, there really is no need to sacrifice return for security. As long as you spread your money around, you can ensure it is all totally protected.
Have your say: How do you rate your provider? Give feedback on your experience with your savings, loan, credit card or debt solutions provider and help others decide which provider to choose. Can you 'beat the credit crunch' and save as much as some of our other customers? Tell us how you get on in our community forum.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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