Author: Ray Prince Added: October 21, 2008
My goodness what a rollercoaster it has been recently! It seems that not a day goes by without more gloom. A bank goes bust or is rescued, an insurance company is swallowed up by another or is nationalised. It is in times like these that people quite naturally get very worried and want to make sure that they are protected. Let's look at cash deposit savings. What are the rules and what protection do you have? Where should you put your money? Are Offset Deposit Accounts in mortgages affected and what about Life Assurance Companies and other investments? What are the rules on deposit accounts? This area is covered by the Financial services Compensation Scheme (FSCS). The basic cover for deposits is 100% of the first £50,000 (was £35,000 prior to 7th October 2008). This ceiling is per investor, per banking license holder. So a single joint deposit with a bank is covered for a maximum of £100,000# However, some banking groups operate several different brands, but have only one banking license. The best example of this is HBOS, as they own Saga, AA, Birmingham Midshires, Intelligent Finance, Halifax and Bank of Scotland. So any investor should limit their total deposits in these six institutions to £50,000. Of course, this is further complicated by the proposed merger between Lloyds and HBOS, and it is unclear as yet how this will affect things. Deposits in non-UK banks operating in the UK are generally covered up to £50,000, but not necessarily all through the FSCS. European Economic Area (EEA) banks can adopt a 'passport' approach, which means that the home country compensation scheme applies first with the FSCS providing a top up, if required. However, two exceptions apply here. They could choose to operate on the 'passport' basis only, leaving depositors with only the bank's home country compensation. The big name foreign players do not do this because of the bad publicity it would bring. Also, the Irish Government increased its compensation scheme limit to €100,000 (about £79,500) on 20 September 2008. So banks like Anglo-Irish and Bank of Ireland offer UK investors a lot more protection than the FSCS. This affects the Post Office, as their accounts are operated by the Bank Of Ireland. 100% protection without any ceiling is available through National Savings & Investments and, for the time being, through Northern Rock. Offset Mortgages Many of our clients quite rightly use offset flexible loans as this can save them a lot of money over the years. However, what rules apply here? There are two possibilities: A rule called 'set-off' could come into play with the banks. This states that Insolvency Law rules that your net position is calculated - savings would be deducted from your debt. But this law may not apply to Building Societies. The Building Societies Association have confirmed that the set-off rule would not automatically apply, although individual societies may have it written into their terms and conditions. Even then, this would depend on the administrators. Life Assurance For UK authorised life companies, it works like this - the FSCS covers 100% of the first £2,000 of value and 90% after this with no limit. Offshore Life Companies They rely on their home company scheme - if any exists. The Isle of Man's scheme is similar to the UK's, whilst Guernsey has no scheme, but insists on 90% of a life company's assets being held by an independent custodian. UK Investment Bonds Invested in Cash Deposits Neither the life company nor the investor can look for compensation from the FSCS if the deposit provider goes down, unless there is a guarantee the investor will simply see the value of their bond fall. On the other hand, if the life company fails, then the FSCS protection would apply. In such an instance the FSCS offers less protection than a direct deposit for sums of up to £38,667, but more cover for investments that are higher than this. Investments For FSA authorised investment business, the maximum compensation is 100% of the first £30,000 plus 90% of the next £20,000. This means a total of £48,000 in respect of investments worth £50,000 or more. The important point to remember is that the FSCS comes into play when an institution fails, not when the investment itself fails. However, if the failure of an investment leaves a bank or insurance company unable to meet any guarantees it has made, then protection rules do apply. Rates Don't forget to make sure you receive a competitive interest rate! It is important to stress that whilst it is prudent to take all these factors into account, the interest rates you get on each account is crucial. These days you should be able to get in excess of 6% AER. The Financial Tips Bottom Line It is worth checking how you would be affected by these rules, and that you won't be affected if a bank fails. ACTION POINT For an overview and more detail on all the issues covered here, see - http://tinyurl.com/3ml6ar (note: the increase to £50,000 may not be covered here, depending on if the site has been updated). Especially, guidance is given here on which brands are owned by who - spend a few minutes of your time to research these links. It could save you a lot of money!
--- Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Just visit http://www.medicaldentalfs.com to get your free retirement planning guide. Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
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