How safe are your savings? These new accounts combine absolute security with table-topping rates of interest!
On 10 May 1866, respected British bank Overend, Gurney & Co. ceased trading, a victim of the Victorian speculation into railway companies. The failure of what was previously known as "the bankers' bank" caused utter panic throughout the UK. Police dispersed an angry mob which gathered to protest outside Overend, Gurney's offices in Lombard Street in the City of London.
If this sounds familiar, then it should.
After Overend, Gurney crashed, Britain didn't see another major bank run until mid-September 2007, when Northern Rock admitted it was in trouble. News of trouble at the Rock caused widespread panic, with tens of thousands of savers queuing up to withdraw their cash.
The Rock on the rocks
At that time, I urged savers not to panic, and predicted that the government would not allow Northern Rock's depositors to suffer any loss. Sure enough, after a few fearful days, Chancellor Alistair Darling stepped in with a 100% government guarantee for all savings lodged with the Rock.
Nevertheless, savers in other banks and building societies began to worry about the safety of their cash. Once again, the Chancellor intervened, raising the compensation on offer from the Financial Services Compensation Scheme (FSCS).
Until the autumn of 2007, the FSCS safety-net covered all of the first £2,000 of savings with a single institution, plus 90% of the next £33,000. Thus, the maximum payout per person was £31,700. This still left many savers exposed to a potential loss. So, on 1 October 2007, the government increased the FSCS limit to all of the first £35,000.
A better safety-net for savers
Despite the improvement to the FSCS, savers were still nervous. In October 2008, panic set in again when Icelandic bank Landsbanki collapsed, dragging down three UK banks with it: Icesave, Heritable Bank, and Kaupthing Singer & Friedlander.
The collapse of Bradford & Bingley and another Icelandic bank, Kaupthing, also frightened British savers.
On 7 October 2008, the safety-net was strengthened once again, this time to 100% of the first £50,000. The vast majority of the UK's 49 million adults have savings well below £50k, so the FSCS safety-net now covers almost all savings balances.
Nevertheless, there are savers, particularly senior savers and pensioners, who have more than £50,000 on deposit. Although they are unlikely to lose any savings above this level, the risk remains that another UK-based savings institution could get into difficulty.
Therefore, for these savers, it makes sense to spread their money around and not keep all their savings with a single institution. For those with substantial savings, it is complicated and tiresome to dollop £50,000 at a time into different savings providers. So, what's the alternative?
The safest home for savings
One answer to the problem of deposit security is to put your money into a government-backed bank. Northern Rock still offers a 100% guarantee to savers, although this may be withdrawn next year or in 2011, and there is an upper limit on how much the Rock can raise from savers.
Today, the safest home for savings is "the government's own bank", National Savings & Investments (NS&I). Indeed, NS&I looks after £96 billion of savers' money, in products such as Premium Bonds, Savings Certificates, Income Bonds, Growth Bonds, and ISAs.
Historically, NS&I offered mediocre rates of interest, knowing that its government guarantee (and the tax-free status of some of its accounts) would attract plenty of savers. However, last week, NS&I took a giant leap by launching the most ultra-competitive rates I can remember.
Just take a look at these fixed-rate, fixed-term savings bonds, which can be opened with anything from £500 to £1 million:
NS&I Guaranteed Growth Bonds
|
Term/Bond |
Interest rate (% AER) |
Rate after 20% tax |
|
1- Year Issue 48 |
3.95 |
3.16 |
|
2-Year Issue 41 |
4.25 |
3.40 |
|
3-Year Issue 42 |
4.40 |
3.52 |
|
5-Year Issue 39 |
4.60 |
3.68 |
What's the big deal?
If you don't think that these savings rates are attractive, then bear in mind that the Bank of England's base rate is at a 315-year low of 0.5% a year. Therefore, these bonds are paying between 7.9 and 9.2 times the base rate, which is astonishing stuff. What's more, these bonds can be opened in joint names, and by savers aged 16 or over, so even teenagers can join in the fun.
As this interest is taxable, a fifth (20%) of your interest is automatically paid to the taxman. Higher-rate (40%) taxpayers must pay any further tax via their tax returns.
Also, in order to grab these rates, you must tie up your money for between one and five years. In other words, don't put your emergency fund or everyday savings into these accounts. You can cash in your bonds early, but it'll cost you 90 days' interest.
In addition, NS&I offers Guaranteed Income Bonds paying a monthly income with similar rates of interest. These would be very attractive to savers who rely on savings interest to supplement their income. And remember that, unlike almost all other banks, NS&I is backed by HM Treasury.
In summary, after years of being second-rate, NS&I's fixed-term savings bonds are sitting pretty at or near the top of the Best Buy tables. Therefore, if you're a saver looking for high rates of interest and total security, I'd take a serious look at NS&I's fixed-rate Guaranteed Growth Bonds. You're unlikely to find a much better deal elsewhere.
PS: Hard-core rate-chasers should also take a look at the fixed-rate bonds on offer from the Skipton BS. With a five-year bond, you can earn a mighty 5.35% AER on £500 to £1,000,000 (5.38% AER for monthly income accounts)...
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