Make sure your money is safe

Cash was supposed to be the easy way to look after our financial futures. But post-credit crunch, even the safety of straightforward saving takes some research, says Laura Howard

We are all familiar with the well-used caveat, "The value of your investment can go down as well as up" - but the less risk-averse of us who prefer stick to plain savings had always assumed that our cash would be safe. 

That was until September 2007 when Northern Rock went bust. And then, last year, the Icelandic banks went under, leaving 300,000 British savers in dire straits.

The Financial Services Compensation Scheme

Many of these savers would not have heard of the Financial Services Compensation Scheme (FSCS) which protects the first £50,000 of any savings - predominantly because the security of their cash had never before been in jeopardy.

Others will have heard of the scheme but had savings that surpassed the then-threshold, while plenty more would simply not have trusted a government promise in the wake of such economic uncertainty.

But luckily, in this instance, the compensation scheme lived up to its name - and fully compensated savers who lived in England, Wales, Scotland and Northern Ireland. Sadly, savers in the Channel Islands and the Isle of Man, who weren't part of the scheme, are still to this day trying to get their money back - with little hope of success.

So, while it's important to note that, to date, no UK resident has lost a penny of their savings as a result of a bust bank, the rules surrounding the FSCS are complex and worth getting to grips with before choosing where to stash your cash.

Limits and what they apply to

In October 2008, the government boosted the FSCS protection limit on savings from £35,000 to the current level of £50,000. But this means per person, and per bank or building society - rather than per account.

In other words, if you hold £30,000 with First Direct and £40,000 with its parent bank, HSBC, you will still only be covered for the first £50,000 as the two brands operate under the same banking licence. In this case, as total savings amount to £70,000, then £20,000 will be left unprotected.

Brands which operate under one FSCS banking licence

Here's a list of brands which operate under one licence:

(1) Lloyds TSB, Cheltenham & Gloucester

(2) Halifax, Bank of Scotland, Birmingham Midshires, Saga, The AA, Intelligent Finance

(3) The Co-Operative Bank, Smile

(4) Yorkshire Bank, Clydesdale Bank

(5) Royal Bank of Scotland, Direct Line, Virgin Money

(6) Bank of Ireland, Post Office

(7) HSBC, First Direct

(8) Abbey, Cahoot, former accounts with Bradford & Bingley, Asda

(9) Alliance & Leicester

(10) Natwest

(11) Barclays, Woolwich

But although cover only applies to each institution rather than to each account, each person is covered individually. This means that joint accounts will be covered up to £100,000.

Merging building societies

Another effect of the economic crisis has been the merger of several smaller building societies with larger ones. In December 2008 for example, the UK's largest building society, Nationwide grew even fatter when - having already merged with the Portman - it absorbed the Cheshire and the Derbyshire too. But what happens to your cash if you hold savings in each mutual involved in a merger? 

The good news is, there's no need to move your savings if you've currently got more than £50,000 in two building societies that are merging together. This rule will apply until December 2010.

Overseas banks

Things become more complicated however when you house your money in an overseas bank. If you turn away from the UK in a bid to get the best returns, will the FSCS still protect you?

If an overseas bank has a UK banking licence, such as First Save (part of First Bank of Nigeria) or the Indian bank ICICI, you have exactly the same protection as if you deposited your cash in the UK. So, if the institution goes bust, the first £50,000 of your cash will be protected by the UK's own FSCS.

Banks in the EU however, operate under a passported protection scheme, called the EU Deposit Guarantee Directive. These include Anglo Irish, Bank of Cyprus, Bank of Ireland (the bank behind many Post Office accounts) and ING Direct.

If any of these banks go bust the saver must first try to recover their money under the country's own national depositor scheme. The UK's compensation scheme would then top up the difference up to its £50,000 limit.

Money on ice

But savers should be warned that, depending on the state of its economy, the country might not always play ball. When Icesave went into meltdown in October last year for example, its government offered British savers no compensation at all.

However, in this case, the UK government agreed to cover all UK depositors for 100% of their money anyway - even it was more than £50,000.

Were they right to do so? Let us know your thoughts using the comment boxes below!

Irish banks

On paper some governments appear to be more generous than ours. Ireland, for example - after initially hiking up the compensation limit to 100,000 Euros, the Irish Government has now abandoned any limit at all. This means that if your cash is held in an Irish bank, every penny is covered under its protection scheme.

However, under European law, banks which have a greater level of protection than the UK's £50,000 offering are not part of the FSCS at all. This means that, while it might seem comforting to have unlimited protection on your cash, if the banks in that country fail, there is no guarantee that the government would have the ability to pay.

Best of British

Your final - and ultimately, safest - option is to stash your cash with National Savings & Investments (NS&I). Because NS&I is backed by Her Majesty's Treasury, your cash is literally as safe as the Bank of England. In fact, the only way you'd lose your savings would be if the UK Government itself went bankrupt!

Compare savings accounts at lovemoney.com