I love it when Times Money Mentor readers get in touch to let me know that my columns have touched a nerve. Back in March I wrote about whether it was possible that banks could collapse – and what you could do about protecting your money.
I got a huge response and lots of enquiries in response to that article and I’m going to cover as many of them as I can in this week’s column. Of course, the biggest question I received was “Are you sure, my bank won’t collapse?”
My answer remains the same; that the financial structures in place in the UK make this unlikely. However, I did look nervously about the news this week that the Bank of England is looking about overhauling its deposit guarantee scheme. This is the amount of cash financial institutions must put aside to cover losses if a lender does collapse. As we saw in America recently, a financial institution can be doing quite well, but if it’s lent a big chunk of cash to business sectors suddenly considered risky then all hell can break loose if the markets get jittery.
So don’t panic, in short. But make your savings work harder. Here’s my guide.
How to keep your savings safe – the options from safest to riskiest
It’s all about risk when it comes to your savings. If you want to pay it safe, then stick the cash in a high-interest rate savings account. If you want to dip a toe cautiously in to the water of risk, consider cash ISAs where the only risk is taking the money out earlier, or investment ISAs where the risk depends on the underlying investment package.
Of course, you could also stick your money in a pension, either by paying extra contributions through your workplace pension (and getting suitable tax breaks in the process) or by paying in to your own personal pension.
After that we hit regulated investments, from relatively vanilla options like bonds or National Savings and Investments (NS&I) which are the ‘slow and steady’ approaches to investing. From there you can explore the vast range of investment products available or use a combo – a portfolio – to make your money work for you. But the risks can be very real. I’m still helping a reader try and recoup just under one million pounds lost when an investment firm failed to follow his request to ‘de-risk’ his portfolio.
Finally – and this is where my heart sinks– there are non-regulated investments. These can range from the obviously non-regulated things like ‘land banking’ (investing in land abroad or at home for future developments), or investing in ‘things of value’ like wine or gold. However, not all investment packages are regulated, like those that are solely focused on property. You’ll need to do a great deal of research before agreeing to any of these schemes. And you won’t be covered either by most regulations or compensation schemes.
The Financial Services Compensation Scheme (FSCS)
The good news is the Financial Services Compensation Scheme covers you for losses of up to £85,000 of your savings across a variety of financial ‘institutions’, should that business go bust. I’ve previously covered those sectors and limits in my guide here
There are some additional benefits that you might not be aware of. For example, if you have a joint account, then you get double protection, or £85,000 per person named on the account, up to a maximum of £170,000.
I should point out that this is the maximum payout you might get – not free compensation. I had to explain to a very excitable reader that the limits did not represent an £85,000 payout per bank that goes bust. So don’t stick a fiver in each bank and pray for disaster. This isn’t the Grand National.
As always, there are a ton of caveats to be aware of. To give you another example, some Banking Groups (collections of businesses operating under a single overall brand) are classified as an ‘institution’ in their own right. So you might have cash in three separate brands but these are classed as ‘one institution’. Confusingly, other superficially similar brands have separate regulatory memberships for their individual brands so are single institutions. In short, check with your bank to see if your savings are in a single or multiple institutions. Get this in writing, just in case…
One of the few advantages of spiralling inflation is the increase in savings rates. However, most indications are that the best rates of interest might be coming down soon.
With savings, the main thing to consider is when you are likely to need access to your cash should an emergency or financial necessity arise. Savings rates increase the longer you ‘lock in’ your money. So if you don’t touch your cash for a few years, you’ll get a better rate of interest. Some of these ‘notice or fixed accounts’ lock in your cash for just a month or even seven days. Bear in mind though that these rates can change and will drop if inflation stabilises and reduces.
However, if you fancy locking in your cash for a longer period – say, five years – then you could really cash in. As my colleague, Emma Munbodh, highlighted last week, some of the best rates are brushing 5% at the moment. If inflation does drop then so will these rates. So you might want to consider locking in your cash soon if you want to take advantage.
You may notice on the comparison tables that a number of newer banks and online saving accounts offer the best rates. So are they covered by the FSCS? If the firm is regulated in the UK, then yes – but don’t assume. The business should clearly state on the website and contract details about your FSCS protection. You can also check on the FSCS website direct too.
What about the £1 million pound savings limit?
There are two potential £1 million pound protection limits that you may have heard about recently. But they relate to very different things.
There are ‘special provisions’ within the FSCS protections for certain high value transactions. So if an important, high value transaction hits your account – like selling your house, for example – and your bank goes bust at this point, up to £1 million may be protected for a six-month period. This is designed to protect people who have understandable (not suspicious) transactions going through their accounts that can’t reasonably be divided up in to chunks of cash to fit the FSCS £85k limit.
There are quite a few situations where you could end up with a big payment that meets the criteria for the £1 million exception. For example, you might have been paid an inheritance. Alternatively, work-related payments like a bonus (lucky you) or dedundancy payment (not so lucky) has hit your account. You may also recive compensation from a legal action or you’ve had an insurance payout too. In fact, the FSCS list is a bit of a downer. Divorce payouts, death, disability, backdated benefits (highly unlikely to fit in to this category, but you never know) all make this list. But here’s the kicker…
You’ll need to prove what the cash was for though. This is described as a ‘life event’ by the FSCS who have a whole list of potential qualifying events on their website. The important thing is to not let these big cash balances linger on an account. The FSCS say they cannot guarantee that the money will be covered until after the event occurs. You might think that realistically, no one will have that level of cash kicking about. However, if you are in between house sales and a purchase and it’s taking longer than you thought, it could be you in that position. So if you are delayed with whatever your intentions are for the money, split the cash between savings accounts asap.
The other limit in the news is the recently scrapped £1million cap on your tax-free pension pot savings. This is the amount that you can pay in to a pension before the funds become taxable. Much has been made about how this will only benefit around 1% of the population. As an aside, I’m sceptical about whether this will achieve its aim of luring recent retirees back in to the workplace. After all, would you be tempted?
From ISAs to investments
As I mentioned before, NS&I and ISAs are the safest of the non-saving account options, but watch out for the catches. MoneySavingExpert are running a great campaign highlighting how the Government’s much trumpeted Lifetime ISA (LISA), designed to get you on the housing ladder, fails to factor in the massive cost of homes for first time buyers. If you are taking out an ISA, the rule of them with all these deals is know the price for exiting early.
Times Money Mentor has a ton of resources, guides and articles for the first-time investors. Even if you only have a limited amount of money to invest, it’s worth looking at your options. However, it’s vital that you take professional advice about your circumstances and the level of risk you are willing to take when investing. Businesses have to follow lots of regulations when giving financial advice. But things do go wrong. The majority of the investment complaints I see come from people who argue that they have either been misled or mis-sold investments – or they have not fully appreciated the level of risk of the investments they have been sold.
The danger zone
I probably get asked four or five times a week about cryptocurrency disasters alone. Despite repeated warnings, far too many people see crypto as a quick way to make money. Well so is roulette, if your number comes up. Crypto currency is unregulated and exceptionally volatile. The sites that sell or manage your crypto wallets are often slow to react when the markets get the jitters and my inbox is littered with emails from people who could not cash in quickly enough. I’m sorry, but if this happens to you, you’re out of luck.
The problem with the terrible savings rates we’ve had for the last decade is that the risk-adverse, often retirees or more vulnerable people, have been lured in to get rich quick schemes. These might be ‘boiler room’ investments where hectoring calls from so called experts persuade people to invest in terrible/fake companies. They might be speculative investments in classic cars or emerging economic sectors in distant countries. The vast majority of these schemes are highly dubious or unlikely to pay out. I’ve seen faked documents, real businesses that have been copied and cloned to sell investments – even fraudsters who have pretended to be lawyers to help people who have been conned get their money back. It’s usually the same group of scammers running the latter grift.
The key to keeping your savings safe is research and cynicism. Check wherever you put your cash thoroughly. Check if the firm is regulated and covered by the FSCS. And don’t believe cold callers or promises of easy cash. All that glitters really isn’t gold.
Featured in Times Money Mentor – Martyn James