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Savings Protection

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At present, I have savings with both Abbey and Alliance & Leicester.

I am worried that if the banks merge my savings won’t be protected. Will they be safe, or is it advisable to put them with a different bank?

Thanks,

Samantha Lee, via email

On the subject of savings, banks and mergers, our expert says:

Thanks for your question; following the Lloyds TSB takeover of HBOS, and the demise of former building societies, Halifax, Alliance & Leicester and Bradford & Bingley, many savers are questioning the safety of their savings.

FSA Protection

It is highly unlikely that the government will let a big bank go down. And now, all UK bank and building society savings products are covered by the Financial Services Compensation Scheme (FSCS).

The banking industry ultimately funds the scheme, although as with the case of Bradford & Bingley, the Government may help with large claims in the short term.

The FSCS is an independent financial policy, set up and regulated by the Financial Services Authority (FSA), which guarantees, that in the event of a bank or building society collapsing, you’ll be able to claim the first £50,000 of any savings with a provider.

Are my savings protected?

Under the FCSC, the first £50,000 you have saved per financial provider are protected. The scheme protects not only your savings, but also any interest you’ve earned. This means if the bank where your savings are deposited collapses, the maximum amount of compensation you’ll get is £50,000, even if you have more saved. This applies to everyone, including children.

It is important to remember that only the first £50,000 of savings deposited in accounts with the same provider are protected. So if you have £40,000 saved in an ISA and another £20,000 in an Instant Access Savings account with the same bank, if that bank collapses, you will only be able to claim back £50,000 of your £60,000 of savings.

Money saved in a joint account will receive twice the protection; therefore the first £100,000. This isn’t a bonus though; it’s simply the same protection as if each account holder had a separate account.

If you have a mortgage with a provider that collapses, such as Bradford & Bingley, your mortgage will be passed onto someone else to manage. It may be the Government, or another bank or building society. You will continue paying your repayments under the same terms and conditions. If you have a mortgage and savings with the same provider though, it is likely the FSCS administrators will deduct your savings from the amount left on your mortgage, so won’t get any compensation, but your mortgage will be reduced.

For example, if you had a mortgage of £175,000 with Halifax, and also had £75,000 of savings with them, then your savings would be used against your mortgage and you’d only have £100,000 left to pay, although you’ll have no savings left. Financially you’ll be no worse of, but if this worries you, it's best to have your savings in a separate financial institution to your mortgage. In case of emergencies, I advise you keep some savings with a separate institution.

Mergers and meltdowns

This is an area of uncertainty when it comes to FSCS protection, as it really depends on the bank, the banking group and who’s merging or collapsing. The technical definition is that your FSCS protected for each company independently registered with the FSA. However, over the years, many banks have merged or been taken over, blurring the lines over what actually constitutes a financial institution.

Some banks are connected, like HSBC which owns First Direct for example. If you have savings in both these banks, and HSBC collapses, then you will only be protected for £50,000 across both banks, as they share the same banking licence.

RBS now owns NatWest, but as they are operating under separate licences, you are protected for up to £50,000 of savings with both bank, in the even of a collapse.

At the moment, Abbey say that they have no plans to change registrations, so if they do merge with Alliance & Leicester your savings will continue to be protected separately by the FSCS, so you’ll be able to claim back the first £50,000 of any savings from each bank in the event of a collapse. This could change though, and we’ll have to wait and see how the merged banks register with the FSA.

Remember!

• You will not get double the protection if you have two accounts with the same bank

• Depending on your banks licence under the FSA, you may or may not be protected for separate savings accounts

• The FSCS does not cover the Channel Islands or the Isle of Man, nor does it cover deposits outside the European Economic Area

I suggest...

If you have less than £50,000 saved with a bank, you have no need to worry; it’s automatically covered by the FSCS. But if you have more than £50,000, then I suggest that you do not put over £50,000 in any one financial institution, by spreading your savings around a number of accounts with different banks. This is the only way of ensuring that all of your savings are protected, even if it is a little pessimistic.

And remember, it’s unlikely that the British Government will let a high-street bank collapse.