Why Your Savings Might Be Unsafe
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In the wake of the Northern Rock crisis and the Bank of England's latest pledge to make more money available in markets, it's no surprise that consumer confidence in financial institutions continues to dwindle.
Where once the idea of a bank collapsing seemed nothing short of crazy, now we are merely (yet repeatedly) reassured that it is unlikely.
I suspect that many fast-thinking Fools will have acted to secure their savings last year, as soon as the Rock crisis exposed holes in the Financial Services Compensation Scheme (FSCS). Still more of you might have moved your money when the FSCS announced changes to its rules in October.
In an attempt to stabilise shaky faith in the system, the FSCS upped the amount of money they would guarantee in the event of a bank's collapse to £35,000 per institution. So if you're lucky enough to have more than £35,000 put aside for a rainy day, the prudent approach is probably to split your savings into separate chunks of £35,000 at various banks.
There is a catch, however.
Different accounts - and even different banks - don't necessarily count as different institutions under the FSCS's regulations. In order to do so, banks must have separate registrations with the Financial Services Authority (FSA) - but mergers and take-overs can mean that several banks might share the same FSA registration. To guarantee that your savings are as safe as possible, you need to know which banks are in bed with one another.
Looking at names alone won't tell you all you need to know about which banks are connected. Should the worst happen, having savings with both Halifax and Birmingham Midshires, for example, could turn out to be a very expensive mistake - even though there is nothing obvious linking the two.
Below, we reveal the big name savings providers that are grouped together under the FSCS's rules. Avoid having more than £35,000 saved in any of the eight groups listed here in order to make sure you aren't caught out in a crisis.
(1) Lloyds TSB, Cheltenham & Gloucester
(2) Abbey, Cahoot
(3) The Co-Operative Bank, Smile
(4) Yorkshire Bank, Clydesdale Bank
(5) Royal Bank of Scotland, Direct Line
(6) Bank of Ireland, Post Office
(7) HSBC, First Direct
(8) Halifax, Bank of Scotland, Birmingham Midshires, Saga, The AA, Intelligent Finance
One exception to this rule is NatWest, which - although owned by Royal Bank of Scotland - runs as a separate institution. Having money saved with NatWest won't affect any savings you might have with RBS or Direct Line should problems arise.
If you're still not 100% sure about your own situation, take a look at a website called How Safe Is Your Money? Input how much cash you have put by, where you've saved it, and the website's tool will calculate how much of your money you might lose if your savings providers went under.
The Mortgage Angle
And this issue could also affect your mortgage too.
If you owe money to an institution as well as have savings with it, your compensation allowance could be calculated in relation to your debt.
Put simply, this means that if you owe a bank or building society £135,000 on a mortgage but also have £35,000 in a savings account with it, the bank would merely cut your outstanding mortgage balance to £100,000 in the event of a crisis. That could be bad news if you had plans for your cash.
Finally, some good news: if you have joint savings accounts with a partner or spouse, the FSCS's guarantee is doubled to £70,000 per institution. Remember, though, that this is common sense rather than kind-heartedness - twice the protection can only be offered to twice the number of individuals, so it only applies if your account is officially in two names.
> You might be hit by similar problems if you try to transfer a balance from one credit card to another. Read When Balance Transfers Go Bad to see which cards are linked.
> Visit The Motley Fool's Savings Centre for a great range of savings accounts.
