Ensure Your Savings Are Safe!

With events this week rocking the banking world, here's a guide to how this could affect your savings, which banks belong to whom, and how you can keep your savings safe.

By banking standards, it's been a hell of a week.

With the recent turmoil you might think Northern Rock, part deux was on the horizon. Recent events have left even the most confident savers with slight doubts, and with nobody knowing who could (if anybody) be next, some savers are asking that all important question: Are my savings safe?

A £35k savings net

Before you start stashing your cash under the mattress, the first thing to remember is that all institutions regulated by the Financial Services Authority (FSA) are covered under the Financial Services Compensation Scheme (FSCS).

This means if your bank collapses, your savings are guaranteed for up to £35,000 per institution. You can check if a financial institution is regulated by the FSA by looking at the FSA Register which tells you if and when the institution became authorised.

However, just to add another twist to the tale, it's important to remember that the FSCS covers up to £35k per authorised institution, and not necessarily per account. A classic example is HBOS, which is just one authorised institution comprised of Halifax, Bank of Scotland, Birmingham Midshires, Saga, the AA and Intelligent Finance.

So, if you were one of those savvy savers who opened an e-Saver with Birmingham Midshires paying a close to market leading 6.52%, but also have savings with Saga, you will only be covered for a maximum of £35,000 across both institutions. In cases like these, you may want to think about spreading your money between other banks.

New beginnings

Another question thrown up by the Lloyds takeover of HBOS is how you will be affected if you have savings with both banks.

Currently, Lloyds TSB and HBOS are authorised separately by the FSA, meaning you are covered for up to £35,000 for each bank. However, this could change if the banks became just one authorised institution - in which case you would only be covered for one sum of £35,000.

On the other hand, the banks could retain their separate authorisations, as in the case of RBS and NatWest - where monies saved with one won't affect the FSCS protection you get with the other. For now, it's a waiting game.

If you want to see a detailed list of banks which fall under the same institutions, read this excellent article, which explains all.

So how safe are the overseas banks?

Banks owned by overseas companies have increasingly occupied the best buy tables in recent years. But as their popularity has risen, so have the questions concerning the safety of these banks and your rights should one go bust.

Icelandic banks such as Landsbanki which owns Icesave, and Kaupthing Edge have particularly been in the limelight, as Jane Baker discussed in the article, Is Saving With Icelandic Banks Safe?

And, as regular Fool readers will know, we've recommended the Kaupthing Edge savings account several times since its launch in February for its excellent catch-free rate of 6.55%. But rates aside, what would happen if things were to go pear shaped?

A tale of two halves

Kaupthing Edge currently operates under full FSA authorisation status, granted to UK company Kaupthing Singer & Friedlander - meaning £35,000 of your money is protected under the FSCS.

However, in section 3.2 of its terms and conditions (yes, I am that sad), it states that, `Kaupthing Singer & Friedlander Limited may, by notice to you, novate the contract between it and you (comprising the Terms and Conditions) to Kaupthing Bank hf.'

This basically means that with 30 days notice, it can change its compensation scheme to one provided by its parent bank, Kaupthing Bank hf.

This means that any compensation you'd receive could be switched to a two-step `passport' scheme, already adopted by fellow Icelandic provider Icesave.

In this case, the first level of protection would be provided by the Icelandic Depositors' and Investors' Guarantee Fund, with 100% of the first _20,887 (approx. £17,400) of your total deposits protected. The remainder would then be topped up (if applicable) by the FSCS to the maximum of £35,000 per UK institution.

Kaupthing Edge is keen to stress that it has no plans to switch its current FSA authorisation status any time soon. In any case, to you and I this makes no difference to the overall amount of protection we'd get.

The only downside I can see to this passport system is that the FSCS stresses that `the home state scheme would have lead responsibility for claims, and would be responsible for paying the first part of any compensation.'

With more red tape and bureaucracy added to the mix - this could result in a longer time to claim back your money in the event of a failure.

ING and Anglo Irish Bank operate in a similar way to Icesave, where existing home schemes are `topped-up' by the FSCS. For a full list of overseas banks operating in the UK that also use this top-up process, click here.

If you're looking for a top-paying savings account from a 100% UK bank, consider the Birmingham Midshires e-Saver account I mentioned earlier. Birmingham Midshires will soon be part of the new Lloyds/HBOS group, so it should be safe barring a huge disaster. Intelligent Finance is also part of HBOS and its isaver account pays an attractive 6.4%.

100% Guarantee

If you have over £35,000 in savings and are looking for total, complete, absolute safety, then there are two places you can stash your cash.

The first is National Savings and Investments (NS&I), where all deposits are 100% guaranteed by the government. The second of course is Northern Rock, which after being dramatically rescued by Brown and Darling is now ironically one of the safest places you could put your money. (OK, the UK government could theoretically go bust, but if that happened, we'd all be in deep trouble regardless of our savings.)

I suppose there's always your mattress, but for my money, I shall continue to chase the top rates. I'll just make sure I don't put all my eggs in one basket. 

I think the real moral of the story is to also ensure you know which baskets belong to whom. Knowing which banks are covered seperately by the FSCS will help to keep your nest egg safe.

More: How To Find The Best Cash ISA / My Favourite Savings Account