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The Golden Rules for Safer Savings

keep your savings in line

Savings are a gamble right now
Protect yourself from crashes
Put your money in the safest place
Find alternatives to banks

The bank crashes in the last few days have put all of us on edge about our own savings.

At the moment all savers are faced with a bit of a gamble. You may think that your bank will go bust so you might move your savings to a safer institution, but also take a cut in interest. This means you’re making less money on your savings, but you know that you can access them at any time.

Or you could bet that your bank won’t go bust. If you do you will leave your savings where they are (as long as you don’t have more than £50,000 in one institution) and continue to earn lots of interest on them. However, if the bank does go bust, you might have to wait months to get your compensation and during this period you won’t be earning any interest.

So the gamble is: move your savings and take a cut in interest that might not be necessary, or leave your savings where they are, but run the risk of the bank crashing and losing a couple of months interest whilst you claim your compensation.

As we are in unchartered territory now and there are no easy answers, we’ve come up with some principles that will help you save more safely.

The Golden Rules

Number One – Never save more than £50,000 in any one financial institution at a time.

The Financial Services Compensation Scheme covers up to £50,000 of your savings for each financial institution. So if you only have up to £50,000 in one bank at one time, even if the bank goes bust, you will get your money back. You just might have to wait a while to get it.

However, any amounts above £50,000 will be lost (£100,000 for joint accounts). So you need to spread your investments.

Don’t be caught out – if two banks function under the same banking license you are only protected for up to £50,000 between the two institutions.

So for example, you may think that Halifax and Bank of Scotland are two separate banks. But they are actually both part of the HBOS group and function under one banking license. So the Financial Services Compensation Scheme would only cover £50,000 across the two banks.

This isn’t always the case. Both Alliance & Leicester and Abbey are now part of the Santander group. However, Santander are keeping them apart, under separate banking licenses. This means the Financial Services compensation Scheme would cover £50,000 for each institution and not the two combined.

Rule Number Two – The safest investments are government owned.

This is because institutions owned by the government are very, very unlikely to fail. So you can feel very safe putting your money there.

The banks that are ultra-safe are therefore Northern Rock and National Savings & Investments. Also, Government Bonds (also known as Gilts) are very safe. But, for the comfort of knowing your money is safe, you will have to take an interest rate cut. In fact these institutions are now actually trying to put investors off by lowering their own rates. So you won’t get the best deal, but you will have peace of mind.

In Ireland, the government has guaranteed 100% of all savings in all Irish Banks. This is good for those outside Ireland too, because the Post Office finance is funded by the Anglo-Irish bank. So if you’ve got savings in the Post Office they are 100% guaranteed for the next two years.

Rule Number Three – Think long term when it comes to the stock market.

If you have invested in the stock market in the short term, you should consider pulling your investments now. Any money you have in stock market investments that you may need in the next few years (less than the next five years) could go down and stay down for a while.

However, if you’re in it for the long haul, now is a great time to buy more as stocks are cheap.

Over a long period of time, the stock market moves on a general upward trend. So even if the market goes up and down in the short-term, over the long-term it goes up and averages a much better annual return than cash savings do.

Rule Number Four – Remember to consider savings alternatives

You do not have to save with a bank. There are other options:

Credit Unions

These are local savings banks that are run in different communities. They have a much lower percentage of bad debts than the big banks making them much safer. They also help local communities, so by saving with them you could be helping someone else who needs to borrow money.

The rates that Credit Unions offer are generally lower than the top rates on the market. However this is because it is a much less risky investment. Less risk means lower rates.

Zopa

Zopa is an online service that calls itself ‘Social Lending’. It tries to get the best rates for all parties – relatively high rates for savers and relatively low rates for borrowers. It does this by cutting out the middle man.

When you put your money in, you decide the least you are willing to make on it and then they will lend it out where and when they can.

All the borrowers with Zopa have to have exceptional credit ratings, which reduces the risk. Plus, the borrowing is spread across several lenders which spreads what risk is left.

Read more about Zopa and Credit Unions in our article about Savings Alternatives.

What to do next?

The first thing to do is to decide whether you are going to pull your savings and re-invest somewhere even safer, or stick with your bank and ride out the storm and even invest more money in the stock market while it's cheap.

If you do want to change, take a look at our savings and investing section for the best accounts and ideas of how to spread your money to reduce your savings risk.

For the most up to date news on the bank collapse, see Jasmine's Blog.