£100,000 Savings Guarantee

With Alistair Darling considering guaranteeing more of our savings, we look at some of the best places to stash that cash.

The recent fiasco concerning Northern Rock has certainly highlighted a few things for a good many of us. For a start, maybe we should all spend a little time finding out exactly how the companies we choose to look after our cash manage themselves. Are banks as safe as we'd all believed? And importantly, with a compensation scheme covering £35,000 worth of individual's savings, should those fortunate enough to have saved more than this keep it all in one basket?

It's certainly given the Chancellor, Alistair Darling something to think about as he commented in an interview to The Times at the weekend that a revamp of the current compensation level is being considered.

Financial Services Compensation Scheme

At the moment, the Financial Services Compensation Scheme (FSCS) is in place to compensate us, should a financial institution collapse. However, only the first £2,000 of savings is totally guaranteed by the scheme. After this we will get back 90% of the next £33,000 (and nothing after this). So should your bank go bust and you had £35,000 in a savings account, you would actually only get £31,700 back (joint account holders would get double this). Any savings over this amount aren't covered at all.

Scary stuff right? Although most of us have nowhere near this amount in cash, many older savers do, and rely on this money for their retirement. And I don't know about you, but I'm not too fond of the idea of losing money, however small a sum.

However, the chancellor's proposed changes would involve adopting an American style system, where savers' money is guaranteed and paid out days after a bank's collapse, funded by a levy on financial institutions. His proposal would increase the maximum guarantee for savers' deposits from £35k to £100k - and importantly, would guarantee the whole sum in full, not just the first £2k.  Indeed this seems a far more sensible sum which I'm sure would help many savers sleep a little more soundly at night.

But in the meantime, if you have more than £35k in cash savings, is it sensible to keep it all "in one basket"? Well, clearly a prudent move at the moment would be to move the surplus (in £35k chunks) to different financial institutions (indeed, even the Bank of England's governor Mervyn King has said it would be "logical" for savers with over £35k to rush to take it out). Not only would you be maximising your potential compensation rights, you'd be spreading your risk, too. However, it's important to make sure you choose different providers as the compensation only applies once, per financial body.

Top homes for your cash

ISAs

First of all, if you haven't already done so consider using your ISA allowance and benefit from tax free interest. Top accounts for include National Savings & Investments' Direct (instant access) ISA, currently paying 6.3%AER on deposits of between £1,000 and £3,000, and Stroud & Swindon BS' Direct 30 Day Notice ISA, paying 6.25%AER (including a 0.7% bonus for 12 months). Note that these accounts are for new money only - you cannot transfer an existing ISA to them.

Existing ISAs

If you need to transfer some money from an existing ISA, the Norwich & Peterborough BS' 1 year fixed rate ISA pays 6.5%AER for deposits of £3k-£27k. However, should you need your cash before the year is up you'll forfeit 120 days interest.

Older savers should check out Newcastle BS' Newcastle 50+ Issue 3 ISA, paying 6.4%AER on sums of £1-£36k. Its rate is guaranteed to be no lower than 0.50% below Base Rate from 11.11.08, but should you need to withdraw your cash during this time you'll forfeit 30 days interest.

Savings Accounts 

For typical savings accounts, top instant access options include Bradford & Bingley's Internet Saver, paying 6.4%AER, and ICICI's HiSAVE account, paying 6.3%AER. Alternatively, Sainsbury's Bank's Internet Saver is paying 6.25%AER and offers the option to have multiple accounts. And Icesave's Easy Access savings account pays 6.2%AER on deposits of £250+ and offers monthly interest.

Older Savers

And finally, there are some great rates only available to older savers. Top of the Moneyfact's table is Coventry BS' Sixty-Plus eSave(2), an internet-only, no notice account available to anyone aged over 60, paying 6.4%AER which is fixed for one year on deposits of £1-£250k (which can be paid monthly). After this it promises its AER will at least match the base rate for a further six months.

And if you'd prefer an account that can also be operated by telephone or in the branch, its Sixty-Plus Notice account pays 6.35%AER on deposits of £10k+ (including a first year bonus of 0.6%) and can pay interest monthly. The rate is guaranteed to at least match base rate until 31.12.2008, but note, this account requires 60 days notice for withdrawals.

Find out more in the Fool's Savings Centre