How Safe Are Your Savings?

Following the Northern Rock crisis many savers fell uneasy about leaving their life-savings with a bank or building society. Here we look at how safe your money is.

Gone are the days of keeping money under your mattress or in the cookie jar, now we pile all our spare cash into bank or building society savings accounts that pay high interest and keep our money safe.

And this is done with good faith that our money will carry on growing until we decide to take it out. However, this faith was rocked when Northern Rock hit difficulty last September and we witnessed queue after queue of worried customers outside branches.

Am I protected?

Money held by authorised banks and building societies in this country are protected under what is known as the Financial Services Compensation Scheme (FSCS).

FSCS is an independent body, set up under the Financial Services & Markets Act 2000 as the UK's compensation fund of last resort for customers of financial services firms.

This means that FSCS can pay compensation to consumers if an authorised financial services firm is unable, or likely to be unable, to pay claims against it.

The compensation limit of £35,000 applies to each depositor for the total of their deposits with an organisation, regardless of how many accounts they hold or whether they are a single or joint account holder. In the case of a joint account, FSCS will assume that the money in that account is split equally between account holders, unless evidence shows otherwise.

This means that each account holder in a joint account would be eligible for compensation up to the maximum limit.

What if I have more than the limit?

You must remember that this compensation is not given per account, but per institution, so basically, if you have all your money with one bank, only the first £35,000 is protected.

The technical part comes with the institutions. Over the years many banks and building societies have merged. So, for example, if you have a savings account with the Halifax worth £20,000, an Individual Savings Account (ISA) that you have been building up for five years (£35,000) with Birmingham Midshires and a joint account with the Bank of Scotland in which you have your everyday spending money (£8,000) - you will have a grand total of £62,000 spread out.

However, because these are all owned by HBOS, you will actually only be protected for £35,000 of that £62,000 total.

If you have less than £35,000 then this isn't really something for you to worry about too much because the likelihood of a bank or building society going bankrupt is pretty slim. If you have more then the best thing to do is to spread your money out among different financial institutions - but be careful to double check that they are actually separate!

As ever there is an exception to the rule and this comes in the form of National Savings and Investments (NS&I) who are fully backed by the treasure and so is 100 per cent secure. The downside is that the rates of interest aren't as attractive as those offered by other financial institutions.

Aren't saving schemes better?

Savings schemes, such as the Farepak Christmas scheme are not protected by the FSCS. This is why so many people's festive season was destroyed when the company went bust. Basically, once the company was gone, the money disappeared too.