The Safest Accounts For Your Savings

Donna Werbner takes a look at savings account which have 100% Government safety guarantees and discovers which are the most competitive.

Out of anyone in Europe, they're supposed to be the most cool-headed and logical. So when the Germans start panicking about the safety of their savings, you can bet a few million Euros that everyone else is, too.

At the time of going to press, there was - as yet - no clarity on whether or not the German Government plans to offer a blanket guarantee on all accounts held by depositors. But there does appear to be some backtracking going on.

It is now being suggested that the German Chancellor, Angela Merkel, was merely making a `political' commitment that German savers would not lose out if a German bank were to go bust.

In other words, it's an `implied' guarantee - similar to the one our Chancellor, Alistair Darling, made when he said he would do "whatever it takes to maintain financial stability and protect depositors." (my bold.)

So what does this all mean? And how does it affect the safety of your savings?

How safe are your savings?

At the moment, the British Government has stopped short of guaranteeing all deposits will be safe if a bank goes bust.

From Tuesday, the amount guaranteed by the Financial Services Compensation Scheme (FSCS) rises to £50,000. This, the Government claims, will protect 98% of savers.

If you have more than £50,000, you can simply spread your money around between different banks and still stay safe.

Sounds simple? There are two potential pitfalls to bear in mind:

• You are only protected if you spread your money between banks with different banking licences. And this is complicated to work out. For example, Halifax and Bank of Scotland are covered under one licence, because they are both part of HBOS. But Abbey and Alliance & Leicester have separate licence, even though they are both part of Santander. Read Which Banks Are Connected? for more information about this.
• If a bank does go bust, it may take months before you get your money back under the FSCS scheme.

No wonder that savers looking for an easy life are pouring their money into banks which do have 100% guarantees backed by Governments. These are:

100% British

Both Northern Rock and National Savings & Investments (NS&I) offer you a 100% guarantee that your savings will be safe, even if you save more than £50,000.

Unfortunately, Northern Rock has pulled its instant access savings account following a huge increase in demand over the past week. It still offers a decent fixed rate Cash ISA at 6%, but most of its products are pretty uncompetitive - indeed, they are deliberately so.

NS&I, on the other hand, offers extremely competitive savings certificates linked to the Retail Prices Index, which is currently 5.2%. The certificates are guaranteed to beat this index, a measure of inflation, by at least 0.85% a year, giving an overall return of RPI plus 1% AER if you hold the certificate for its full term.

And best of all, the return is tax-free. To get an equivalent return elsewhere, higher-rate taxpayers would have to find an account paying a whopping 10.33%, while lower-rate taxpayers would have to find an account paying 7.75%.

Of course, inflation may fall soon, bringing the RPI and the rate down. But at the moment, it is by far the best return you can get on a 100% safe account.

However, you do need to be prepared to lock your money away for at least a year to earn any interest at all. And the maximum you can invest in each certificate (there are two - a five-year certificate and a three-year certificate) is £15,000.

100% Irish

Irish banks, such as Bank of Ireland and the Anglo-Irish Bank, have a 100% guarantee from the Irish Government. This includes savings accounts with the Post Office, as it is funded by the Anglo-Irish Bank.

If you're looking for a 100% safe instant access savings account, the best one around is the Anglo Irish Easy Access Deposit Issue 2 account. It currently pays 6.4% AER, which is only 0.2% below the overall instant access best buy account, the Alliance & Leicester eSaver Issue 2, which pays 6.6%. (The A and L account includes a bonus and a withdrawal penalty so it's not a perfect account by and means.)

But there is a big down-side of the Anglo Irish account, for me: you cannot operate it online - all transactions must take place via the telephone or by post. On the positive side, however, Anglo Irish will transfer funds into your current account via CHAPs (same day) transfer at no extra charge.

100% Danish

The Danish Government this morning (Monday) offered a 100% guarantee on all savers' deposits. However, this is not much use for savers in the UK, as no Danish banks operate here.*

What next?

If Germany does decide to guarantee 100% of savings to shore up confidence in German banks, then it is highly likely that Britain will follow suit.

What do Fools think? Would this be a good idea? Are you worried about your savings? What do you think the future holds? Let us know, using the comment boxes below.

*This article has been corrected - there was a Danish-English misunderstanding, it seems!

More: The Government Must Guarantee Savings!