Xmas Savings Clubs A Year On From Farepak

A year on from the Farepak scandal, we look at whether Christmas Savings Clubs are ever a good idea.

As Christmas approaches and the bills start to mount, I'm sure many of us are wishing we'd stashed away more cash in advance.

It's a bit late in the day to save for this year's festivities, but if you plan now, there are lots of options open to you if you want to put something away for Christmas 2008.

But should you use a savings account at a bank and building society to do this - or a Christmas savings club, which will pay you no interest whatsoever?

Despite the Farepak scandal last, Xmas savings clubs are still top choice with hundreds of thousands of savers in the UK. Why is this? What advantage can these clubs possibly offer over interest-paying savings accounts?  

Christmas Savings Clubs

After last year's Farepak debacle, it would be understandable if many people chose to avoid these schemes like the plague. Around 120,000 people lost some £40 million when the savings club collapsed and went into administration in October 2006. The firm's liquidators recently said the victims are expected to receive just 5p for every £1 lost - eventually.

But steps have been taken to ensure such a disaster doesn't happen again. Following a government review earlier this year, money paid into similar Christmas savings schemes will from now on be kept in ring-fenced accounts, so customers' money can be returned to them if a company does go bust. Furthermore, the industry now has a self-regulatory trade body, the Christmas Prepayment Association, whose members adhere to a strict code of practice.

There is further good news for club savers. The Post Office, one of Britain's most reputable brands, recently began offering its own Christmas savings scheme. From January next year, savers will be able to make deposits of £5 to £500 at any branch, and will be able to save a maximum of £1,000 a year.

Scheme members will not be able to withdraw money until November 2008, when they can use their Christmas Club card as a debit card at selected shops, or exchange money for gift vouchers. So far, the Post Office has negotiated deals with some 200 chains, including Sainsbury's, Argos, Boots, Debenhams, House of Fraser, Thorntons, Woolworths and WHSmith.

But I remain sceptical. It seems rather un-Foolish to be putting your money into a savings scheme which pays you no interest (although the Post Office claims its discounts and deals will provide benefits comparable with high street bank interest rates).

Furthermore, the security aspect of these schemes remains a concern. If you are going to put your hard-earned savings into any pre-payment scheme, it's a good idea to find out how your money is going to be stored, and with whom. Look for an assurance that all money saved through the scheme will be held in a protected account.

So why do these schemes remain so popular, particularly with savers on low incomes?

For many, the main advantage of these schemes is that they lock your money away. This means that nobody can pilfer the account ahead of time and spend the savings elsewhere, which is particularly important to savers who are worried they may not be disciplined enough to leave money where it is - or fear that, when money is tight, other members of their family may put pressure on them to empty their savings accounts.

The amount you put away every month can be small, and it can vary. This means you can put aside as much, or as little, as you can afford, when you can. This is particularly useful for those who are on low incomes, or whose incomes vary.

What's more, you don't need a current account to save money in this way, and proponents of these schemes say receiving vouchers rather than cash at the end of the year makes the final spend a lot more fun, and means you're less likely to end up frittering your savings away on non-Christmassy odds-and-ends.

What's The Alternative?

Most people who want to save for Christmas opt for a savings account, because the money saved will earn interest, which can be a very welcome addition to the Christmas savings pot.

However, I can see why many bank and building society savings accounts don't appeal to the Christmas club faithful. If you're looking to save small, varying amounts at irregular intervals, and you want to be able to access the money in Christmas 2008, the choice is rather limited.

Many savings account providers require you to have another account with the same bank (usually a current account), or access to the internet. Other accounts may penalise you when you want to withdraw your money, and require you to make fixed-amount payments every month, via a standing order.  

So predictably, it seems, there's no such thing as the perfect Christmas savings scheme. If you are self-disciplined, have a current account and are able to save regularly, then you are probably better off with a traditional savings account which pays you a decent rate of interest (check out our savings account comparison centre to compare different account).

But if you are worried you will be tempted or pressured into spending your savings before you intended, then a Xmas savings scheme with a reputable company like the Post Office might well be a better option.

Whatever scheme you decide to go for, I wish you a very merry Christmas and a prosperous 2008! 

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