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FSCS Compensation

Have you got a burning money question? Our expert Chris Eagle is ready to help. Email him at OurExpert@CreditChoices.co.uk

Q ~ Dear Chris,

I've finally received all my money back after Icesave was declared insolvent a few months ago.

Now I want to put my savings back into an account that is going to offer me a good interest rate, and have been considering my options. What do you suggest I do with my savings?

Thanks,

Natalie Darlington, via email

Tuesday 9 December, 2008

On the subject of savings and FSCS compensation, our expert says:

Hi Natalie,

Thanks for your question; following the collapse of Icesave, many of the banks 320,000 British customers are finally being reunited with their frozen savings through the Financial Services Compensation Scheme (FSCS), and are now faced with the dilemma of where to put their savings.

Under the FCSC, an independent financial policy regulated by the Financial Services Authority (FSA), the first £50,000 you have saved per financial provider is protected.

With the Bank of England cutting interest rates, and financial experts predicting another cut in the coming months, customers claiming back their compensation from the FSCS may be somewhat disappointed with the rates on savings accounts at the moment.

Main considerations for reinvesting:

Find the account/s with the best rates returns
Be clear whether you need access to your money at short notice – you may find that the headline rates on some accounts don’t apply if you make withdrawals
The security of the financial institution in which you are depositing you money
Do you want a tax-efficient investment this time?

Savvy savers now have three options available to them:

ISAs

ISAs (individual savings accounts) allow each UK tax payer to save a certain amount of money each year, tax free. They are currently the best way to save.

There are two types of ISA: a cash ISA (also called a mini ISA) and an investment ISA (also called a maxi ISA). Each tax year you can deposit up to £3,600 in a cash ISA, and £7,200 in an investment ISA. This is called the tax free allowance.

Abbey (www.abbey.co.uk) currently offers an interest rate of 4.0% on its cash ISA, and the minimum balance is only £1.

Read this article to find out more about ISAs

Compare ISAs

Notice savings accounts

Notice Savings Accounts only give you access to your money after a specified time period. If you don’t need your money straight away, then you might be able to get a better rate of interest with a notice savings account.

These accounts will only let you withdraw money after a “notice period.” Typical notice periods are thirty days (such as Alliance & Leicester’s eSaver), sixty days or ninety days, although some can be as short as a week. It is worth shopping around for an account which best suits your needs, because if you don’t give sufficient notice before making a withdrawal, you’re likely to face a penalty payment.

Though you may be wary of foreign banks following the collapse of the Icelandic banking giants Kaupthing Edge and Landsbanki, there is one foreign savings account that is regulated by the FSA and protected under the FSCS. Indian bank ICICI (www.icicibank.co.uk) currently offer an interest rate of 4.50% AER on its fixed rate savings account.

Read this article to find out more about notice savings accounts

Compare notice savings accounts

Instant access savings accounts

Instant access savings accounts (IASAs) can be a great way to get the most from your savings without losing fast access to them. They pay you interest on your savings while giving you instant access to your money, allowing you to make immediate withdrawals whenever you need the cash.

IASAs generally offer better interest rates than current accounts, enabling your hard-earned cash to grow faster, and as they offer instant access, there is no need to go through the processes normally associated with withdrawing cash – no notice period is required and you are not (usually) penalised for withdrawals.

Abbey (www.abbey.co.uk) have an IASA that currently offers a rate of 4.5%.

Read this article to find out more about instant access savings accounts

Compare Instant access savings accounts

What do I suggest

If you have less than £50,000 deposited with a bank, you have no need to worry about your savings being protected in the event of another bank collapse; they’ll automatically be covered by the FSCS. Your top priority here would be to put the money in an account that offers a good rate of interest, such as the Abbey ISA or the Halifax fixed rate savings account, that currently offers a rate of 7.00% (providing you deposit between £25-£500 Direct Debit each month).

However, if you have more than £50,000 in savings, then I advise you to not put over £50,000 in any one financial institution. You should spread your savings around a number of accounts with different financial institutions; this is the only way of ensuring that all of your savings are protected, even if it is a little pessimistic. There have been a lot of mergers and take overs in the UK in last few months, so check which financial institutions are owned by others. This will ensure you really are making deposits with different companies.

I hope this answers your question Natalie!