Your savings are safe in a foreign bank

Savings and ISAs

John Fitzsimons
Updated on 04 August 2010 | 10 Comments

Foreign banks offer some of the best rates to savers, but is it risky to trust them with your savings?

With bank base rate widely predicted to remain mired at record lows for some time to come, it's not easy for savers to get a decent return on the money they sensibly put aside each month.

One of the few ways to get a respectable rate, that's guaranteed, is to lock that money away into a savings bond. However, if you're the sort of person that likes to stick to familiar brands that you find on the high street, a cursory look at the best buy bonds will be an eyebrow-raising affair – most of the best deals are offered by foreign banks you may never have heard of.

The Icelandic affair

Rewind a couple of years, and many people wouldn’t think twice about putting their money in a foreign bank. With the various Icelandic banks offering numerous killer deals, thousands of Brits (including a fair few local Councils) were only too happy to place their savings in the hands of the guys from Reykjavic.

Of course, then the Icelandic economy collapsed, with stacks of British savers left worrying if they'd ever see their cash again. Suddenly relying on banks that you don’t find on the high street to look after your savings looked like a risky move.

So just how safe is it to put your money into a foreign bank?

The FSCS

In today's video, I'm going to highlight five things you should consider when choosing a savings account.

The one thing you should check before you put your money into any savings account is which compensation scheme the bank is part of. Within the UK, the relevant scheme is the Financial Services Compensation Scheme, which covers up to the first £50,000 in deposits, though this is set to increase by the end of the year thanks to European Law, most likely to around £80,000.

This was the scheme that all of the Icelandic banks had signed up for, so if you were unfortunate enough to have placed all your money into Landsbanki and the rest, the first £50,000 would be covered. One of the problems that came out of the Icelandic experience was that in some instances it took a long while for that money to be returned.

However, the FSCS reckons that from January it will be able to deal with deposit claims within just seven days.

Other compensation schemes

While the FSCS is in place for all UK regulated savings schemes, it's not compulsory for banks offering savings accounts in the UK to be regulated in this way – they can instead rely on the protection scheme offered by their home government.

This doesn't apply to banks from outside of Europe, so with ICICI for example you can rest easy that your money is protected by the FSCS. However, if you want to bank with the Post Office for example, as it is part of the Bank of Ireland group, you'll be relying on the Irish government to get you back your cash should things all go horribly wrong.

A long-term bond

Hopefully your fears about foreign banks have been alleviated somewhat, so let's take a look at the best bonds. The biggest and best rates, unsurprisingly, are on offer if you look your money away for a longer period of time.

That's great if you know you won't need that money for a few years, but not so good if you have something in mind to spend the cash on in the next few years. You are also taking a gamble that interest rates won't surprise us once again by rising faster than expected.

10 top long-term bonds

Bank	Length of bond	Interest rate	Minimum / maximum investment	Compensation scheme?
ICICI Bank HiSAVE account	Five years	4.75%	£1,000 / none	FSCS
Aldermore	Five years	4.56%	£1,000 / £1m	FSCS
AA	Five years	4.55%	£1 / £5m	FSCS
State Bank of India	Five years	4.50%	£1,000 / none	FSCS
Barnsley	Four years	4.25%	£100 / £2m	FSCS
Aldermore	Four years	4.25%	£1,000 / £1m	FSCS
State Bank of India	Four years	4.20%	£1,000 / none	FSCS
ICICI Bank HiSAVE account	Three years	4.15%	£1,000 / none	FSCS
Dunfermline BS	Three years	4.11%	£100 / £1m	FSCS
Derbyshire BS	Three years	4.11%	£100 / £1m	FSCS

A shorter bond

Personally, I much prefer the idea of going for a bond over a shorter period, a maximum of two years. That way, if the experts do end up getting it wrong – and it wouldn't be the first time – you are in a more flexible position to take advantage of the improved savings rates that should follow a rise in Bank Base Rate.

10 super short-term bonds

Bank	Length of bond	Interest rate	Minimum / maximum investment	Compensation scheme?
ICICI Bank HiSAVE account	Two years	3.70%	£1,000 / none	FSCS
Coventry BS	Two years	3.70%	£1 / £250,000	FSCS
Dunfermline BS	Two years	3.60%	£100 / £1m	FSCS
Derbyshire BS	Two years	3.60%	£100 / £1m	FSCS
ICICI Bank HiSAVE account	One year	3.10%	£1,000 / none	FSCS
Aldermore	One year	3.01%	£1,000 / £1m	FSCS
Santander	15 months	3%	£1 / £2m	FSCS
Barnsley	One year	3%	£100 / £1m	FSCS
Turkish Bank	One year	2.90%	£5,000 / none	FSCS
Bank of Ireland	One year	2.80%	£2,000 / £1m	Deposits 100% covered by Irish Government

More: How to spot a fake banknote | Buy life insurance while it's still cheap

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Comments

summer-dreams
06 August 2010
When I was on holiday in Turkey in 2002, I heard rumour of high interest rates in their banks. So I went into a high street bank in the resort I was staying in, and they told me I could buy a government bond that had a guarenteed interest rate of 50% per year. I invested £500 with them as I wasn't totally sure how safe it was, the bond was to last for 6 months. Then after 6 months I re-invested (from England) for another 6 months. After 1 year I withdrew the money back to my UK bank account and it came to £750. I was and still amazed that I got that level of interest and wondered if anyone had heard of or had similar experiences and would it be safe to do this again??
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almmiller
05 August 2010
I thought this was all sorted after IceSave. The Icelandic banks were not covered by the FSCS, they were PASSPORTED IN which made their support the responsibility of the Icelandic Government. European governments stepped in when it became clear that the Icelandic government was not going to pay up (it treated its own citizens differently!). Britain (and the others) are still trying to get the money out of Iceland and the Icelandic people are still refusing to pay (see their latest referendum on the subject) so everyone can think themselves lucky that they got anything (!) back. There are still some foreign banks using this mechanism so if they are not part of the FSCS steer well clear. What is not so widely realised is that the FSCS does not pay out per ACCOUNT. It pays out per BANKING LICENCE. If you have accounts with several British banks who are part of a group and they all trade under the same banking licence then you are only covered up to £50000 of the combined total of all accounts that you have with any/all members of the group. The details are available online (try thisismoney or moneyfacts) and it is WELL worth checking since who owns who is far from obvious. As a case in point, ICICI has its own separate UK banking licence and is covered up to the standard limit so there is no more risk than than there is with Barclays or NatWest.
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UpHillAllTheWay
05 August 2010
I didn't invest in an Icelandic savings scheme before, because I figured that with world markets looking shaky, a relatively low-population, primarily fishing nation with a high average standard of living didn't seem a probable place to be providing top rates. True, there were heaps of money sloshing about, but I just couldn't see what it was founded on or where it was coming from. I see the top two offers in both short and lonjg term are from ICICI. I must say, India, with its huge population of relatively low-paid people and a burgeoning manufacturing and service economy, seems a much safer place. 
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