Savings

The most asked questions regarding saving accounts, banks and building societies

• Guardian Money team
• The Guardian,
• Saturday September 20 2008
• Article history

Lloyds: Stepped in to buy-up the ailing HBOS. Photograph: Toby Melville/Reuters

Lehmans goes bust, AIG is nationalised, HBOS is rescued - it's been an extraordinary week, and there could be more to come. So, amid the turmoil, what's 100% safe?

It's not sexy, it's not racy, but if you're looking for an absolutely copper-bottomed guarantee that your money will be safe, no matter what, then make a beeline for National Savings & Investments. NS&I is the government's savings bank, backed by the Treasury, and unless you have access to the vault at the Bank of England, it's probably the safest place to keep your money in Britain. And if you don't believe us, take it from Stephen Hawking and the other heavyweight celebs that NS&I has recruited for its new TV ad. After all, Hawking knows a thing or two about black holes.

The front page of the NS&I website carries the headline "100% security for your money", and in these times of trouble, it seems that anxious savers are taking it at its word. Money has been piling in to National Savings ever since the Northern Rock debacle; last month it announced it had enjoyed its strongest ever annual sales performance.

The price of safety is high. You can usually get better rates elsewhere - and NS&I this week slashed rates on some of its most popular products, including fixed-interest savings certificates, children's bonus bonds and guaranteed-income bonds. But in the current environment, some worried savers won't care that the rates aren't the best you can get.

Is your money really absolutely safe? "There is no way you could lose your money," a spokeswoman assured us.

In terms of what's on offer, its Easy Access Savings Account has been popular among those looking for a no-hassle, no-frills home for their cash, even though its rates of interest are less than impressive. It is an instant-access account which comes with a cash card that lets you pay in money at post office branches and make withdrawals from ATMs. It can be opened with £100 or more, and has tiered interest rates, paying between 1.85% gross interest (for deposits of between £100 and £999) and 4.4% (£50,000-plus).

Those looking for a better rate of interest might want to consider the NS&I Direct Isa, paying a tax-free 5.3%. The minimum opening deposit is £1,000, and it is aimed at those happy to manage their account by phone and online.

If you're a higher-rate taxpayer and/or you're worried that inflation will hang around for a while, it's worth taking a gander at National Savings' index-linked savings certificates. As inflation has surged, so has the attractiveness of these lump-sum savings products. With index-linked savings certificates, the value of your investment increases in line with inflation (as measured by the Retail Prices Index) and earns guaranteed interest on top - with all your returns tax-free. These three- and five-year savings products currently give higher-rate taxpayers a savings rate equivalent to around 9.5%.

To get the best return you have to stay in for the full term, although you can get out after one year and still benefit from index-linking and extra interest. You can invest between £100 and £15,000 per issue.

The bad news is that rates on some of NS&I's fixed-rate investments were this week hacked by up to 0.75%. It means the latest issue of children's bonus bonds now pay 3.7%. Those on sale little more than a year ago were paying 5.1%. Nevertheless, if you want to save for a child, and do not want to take risks, these are well worth considering. They are five-year fixed rate products that can be bought by anyone over 16 for a child under 16. You can deposit between £25 and £3,000 in each issue, and all returns are tax-free for both child and parent.

The rates on the two- and five-year fixed-interest savings certificates, which offer a guaranteed tax-free return, have fallen to just 2.95%.

You would have thought that NS&I would have been quick to crow about how much lovely money it has been pulling in lately. Last year, at the height of the Northern Rock crisis, it was happy to give out this information, but now it appears the government has gagged its savings bank. "We do have a new policy at NS&I that we will not issue sales figures outside of our quarterly reporting in order not to rock the financial markets," says the spokeswoman, who adds that it is too early to say if the current instability has affected sales.

Talking of Northern Rock, thanks to the government's intervention, the Newcastle-based institution is also able to offer its customers a guarantee that any money in its accounts - whether it's £1 or £1m - is 100% secure. However, this is not an open-ended commitment; if and when Northern Rock returns to the private sector, it is likely to be put on to a similar footing as other banks and building societies.

Are my savings safe?

Lloyds TSB's rescue of Halifax's parent company HBOS - a deal reportedly brokered by the prime minister - suggests there is an implicit state guarantee of the major high street banks, and all the money people have saved with them. In other words, HBOS, HSBC, Barclays and the like are simply too large, and too crucial to the economy, to be allowed to fail. If you follow that logic, big is definitely best.

Shouldn't I just put it all under the mattress?

Don't go there. If your cash is nicked, home insurance policies typically pay out somewhere between £500 and £1,000 for stolen money.

So what should savers do?

Don't put all your eggs in one basket. If you've got a fair bit of cash, spread your savings around a number of different institutions. Check who owns the bank or runs its savings operation. That's because people could be left out of pocket if they have their money in two or more savings providers that happen to be part of the same banking group, which then collapses.

If you've got less than £35,000 in an account, you can relax: you will get all your money back. If you have more tied up in one institution, now may be the time to think about finding another home for some of it.

Which bank will be the next to get into trouble?

That's one of the $64,000 dollar questions! Who, a few weeks ago, would have thought that the mighty HBOS - the Tesco of the banking world - would have to be rescued? Royal Bank of Scotland's share price has certainly had a torrid time of it, falling by 10% on Tuesday, 10% the next day and 4.5% on Thursday. The Guardian's Nils Pratley wrote on Thursday that RBS "shares some of HBOS's financial characteristics. The size of RBS's loan book exceeds the size of its deposit base - not to the same degree, but the number is still large". But he added that RBS is a bigger, more diversified bank.

What happens if my bank or building society goes bust, and will I lose all my money?

There is an official rescue fund called the Financial Services Compensation Scheme that protects savers if their bank or building society goes under. Payouts are "per person per bank", and were made more generous following the Northern Rock debacle. If your savings provider goes belly-up, you will now receive the first £35,000 of your savings money back, and there are proposals to raise this to £50,000. The £35,000 limit applies to the total amount held with an organisation, regardless of how many accounts someone has, or whether they are a single or joint account holder.

I have all my savings at Halifax. Are they safe?

Probably more so than they were earlier this week. The merger is designed to shore up HBOS and protect the millions of savers who hold a total of £243bn in their accounts. Even if the new combined bank should fail, savers would be protected under the compensation scheme.

Prudence suggests that you do not hold more than £35,000 at any one institution. But prudence might also suggest that you think carefully before moving the cash to smaller banks offering better rates. Not all of them will be able to clamber into the lifeboat.

I have accounts at both Halifax and Lloyds TSB. What should I do?

Until the deal is done and dusted, which could take months, the two banks will continue to be treated as separate institutions, so customers will get protection for the first £35,000 they hold in each. It will be interesting to see what happens when the merger is complete. In the case of Royal Bank of Scotland, which took over NatWest a few years back, most of its banking brands are separately authorised by the Financial Services Authority. So someone with money in RBS, NatWest, Tesco Personal Finance (which is 50%-owned by RBS) and Coutts would get a separate helping of protection for each of these.

Other banks have done things differently. For example, the HBOS group includes Halifax, the Bank of Scotland, Birmingham Midshires and Intelligent Finance. Birmingham Midshires also provides savings accounts for Saga and the AA. At the moment, all six of these brands operate under a single FSA authorisation, which means that if someone had £35,000 in a Halifax account, and the same amount in accounts with Birmingham Midshires, the AA and Saga, and HBOS went bust tomorrow, instead of getting £140,000 compensation, they would only get £35,000.

It all sounds horribly complicated ...

It is. MPs on the Commons Treasury select committee this week said it is unreasonable to expect customers to know whether their savings provider has an individual or a shared banking licence. They have urged the FSA to look into requiring each banking brand to have its own authorisation.

What'll happen to Howard Brown, the singing star of those annoying Halifax ads?

On Thursday, the Sun stuck Brown on its front page and said it was unclear whether he would be keeping his job. The paper rigged up an image of him riding a Lloyds TSB black horse, which might give the ad men some ideas. Only last month, the Star reported that he had been axed from the ads "because he is too cheery for the credit crunch".

My wife and I have a joint account. What happens to us?

The good news for people with joint accounts is that they effectively enjoy twice the normal level of protection. The compensation scheme will assume the money is split equally between the two account holders, so each person would be eligible for the full £35,000 compensation. In other words, up to £70,000 would be covered.

Doesn't all this prove I should put all my savings in a building society?

Once viewed as boring, building societies such as the Nationwide have come into their own lately, with many savers seeing them as a safe haven in times of trouble. They are immune from speculative attacks by hedge funds because they are not quoted on the stockmarket. And the sector is proud of the fact that no member of a building society has lost any of their investment since at least 1945. Also, building societies tend to help their own, with one usually stepping in if another gets into trouble.

I thought some building societies were putting money into all sorts of dodgy things?

The sector's reputation as safe and unsexy took a blow this month when it emerged that more than a quarter of Derbyshire Building Society's balance sheet was made up of adverse credit and sub-prime loans. Nationwide has seen its lending volume drop by 40% and booked losses of more than £100m on six structured investment vehicles, while more than a quarter of lending by Britannia, the second-biggest society, is in areas such as buy-to-let, credit impaired and "self-cert" loans.

What if my money is in the UK arm of an overseas bank?

If it is the UK division of a non-European bank, for example ICICI Bank UK, which is owned by one of India's largest financial institutions, the protection is exactly the same as that applying to British-owned banks.

What if the parent company is based in Europe?

It's slightly more complicated. EU rules mean all countries in the European Economic Area must have a compensation scheme in place, but in most cases these schemes are less generous than the UK's (France and Italy are the exceptions). However, European banks have the option of joining our scheme to "top up" the level of protection offered, and most reputable European banks with a UK presence have done just that. This means you would end up being entitled to the same amount, but the compensation would be provided by two schemes.

Which European banks have topped up?

They include ING Direct and Triodos Bank (both with parent companies in the Netherlands), Bank of Ireland (which provides many of the Post Office's savings accounts) and Landsbanki. For a list, log on to fscs.org.uk.

How's Barclays faring?

Barclays bounced back this week by snapping up some of Lehman Brothers' prime US assets for what many said was a bargain price. But analysts are still concerned about its wholesale funding gap which though less than half the level of RBS or HBOS, is still huge.

What about HSBC?

HSBC has made huge losses because of the US sub-prime mortgage crisis, but its shares have outperformed its rivals. This week it became the world's biggest bank by market value - though how long it will retain that title ...

Abbey?

Abbey is probably fortunate that it was taken over by Spanish banking giant Santander, which is also in the process of swallowing up Alliance & Leicester. Santander is regarded as one of Europe's strongest banks, partly because it has little or no exposure to the US sub-prime mortgage market. But problems in the Spanish property market could drag it down.

How about Bradford & Bingley?

The former building society and leading buy-to-let lender has endured a savage few months. Its share price was just 25p on Thursday; in April they were worth more than £2. A few days ago, Moody's, the ratings agency, slashed its credit rating. If things carry on like this, Mr Bradford and Mr Bingley will soon be found sitting in a shop doorway, asking passers-by to throw a few coppers into their bowler hats.

I'm an HBOS shareholder. How much will I get?

There are nearly two million Brits who hold shares in HBOS, which tumbled from £10 this time last year to 88p in frantic trading before the rescue by Lloyds TSB. Assuming the deal goes ahead, HBOS shareholders will see each share exchanged for 0.83 shares in Lloyds TSB instead. At the time the deal was announced, that worked out as 232p per HBOS share. But the next day, the Lloyds TSB share price dropped to around 230p, so that meant HBOS holders would receive shares worth 190.9p. The next few months will be tortuous as the deal has to be approved. It's entirely possible that in the meantime speculators will drive down Lloyds TSB's share price.