Your cash savings and their safety
Bank rate at an all-time low
Last Thursday the Bank of England Monetary Policy Committee (MPC) lowered the Bank Rate from 0.25% to an all-time low of 0.1%. It was only a week since the rate was last cut from 0.75% and with the new Governor, Andrew Bailey, starting the job at the beginning of the week he has already provided the promised ‘prompt action’ to limit the long-term effect of COVID-19 on the economy.
As we know, rate cuts are designed to make borrowing cheaper and to encourage spending, and this will be welcome news for many except those of you with cash savings.
27th March 2020
Stuart Coombe See profile
Banks or building societies remain the safest place to keep your cash in the short term. Keeping enough money easily accessible on deposit is a high priority for your financial security and this should be one of the foundations of your personal financial plan.
Although you should be holding adequate reserves of cash, historically over longer periods of time the return on deposits struggles to keep pace with inflation.
We know it’s tempting to look at alternatives to cash deposits when savings rates are so low. Whilst we believe that investment portfolios will likely deliver better long-term returns, this is not a risk-free option and therefore moving funds from a very safe environment to one where capital is at risk needs to be considered carefully and as part of your longer term plan.
That said, for money you are prepared to take a long-term view on, with stock markets significantly lower than at the beginning of the year, this could prove to be an opportune moment to invest.
In these uncertain times, with your capital tucked away in savings accounts, you’d assume that there’s some kind of protection in place if anything happened to your Bank or Building Society. But exactly how safe are your savings in the event of, for example, an authorised financial services firm going bust?
Banks have been under intense scrutiny since the credit crisis in 2008 and The Financial Services Compensation Scheme (FSCS) was established to provide you with a level of protection up to £85,000 worth of cash savings covered per individual or business, per financial institution.
What does it mean by ‘per financial institution’, you might ask. Well, it’s a good question because the FSCS only applies to funds that are saved within a financial institution with a banking authorisation. This means that not all bank accounts, or even all banks, are covered.
If you have savings of £85,000 or more with two different banks who are owned by the same institution with just one authorisation, for example if you had savings with Halifax and Birmingham Midshires, you’re only covered for a total of £85,000.
Protection for business deposits
The FSCS generally protect companies’ deposits, regardless of the size of the company. Most types of regulated financial services company are not eligible though.
An eligible company depositor will be protected up to £85,000 as above. Eligible business partnerships are also entitled to one lot of up to £85,000.
Individual deposits of directors or partners with an institution will not count towards the businesses limit of £85,000. However, if you’re a sole trader then all accounts, business and individual will count towards the limit per institution.
Temporary high balances
On the plus side, there’s a measure in place to protect temporary high balances for up to £1m for six months for some funds.
There are a limited number of situations whereby you would have a qualifying temporary high balance, the most frequent of which would be money deposited to buy – or money received from selling – a main residence. General savings for a property don’t qualify, nor do transactions for property that isn’t your main home.
The full list of situations covered by the temporary high balance can be found here: https://www.fscs.org.uk/how-we-work/temporary-high-balances/
If any of this raises concern then don’t worry, there are things you can do to optimise your protection:
With numerous mergers over the years such as The Co-operative Bank and Britannia, you should check which financial institution your money is with – there are online tools available to help with this, for example, https://www.which.co.uk/money/savings-and-isas/savings-accounts/fscs-are-my-savings-safe-acjlu3l9hd48#Who%20owns%20who
If you’re with two banks under the same banking authorisation and your savings with those banks exceeds £85,000, it might be worth transferring the excess to an account with another bank, or use National Savings and Investments which have 100% protection as they are backed by the UK Government.
If you don’t want to spread your savings across banks, a joint account with your partner will essentially double your coverage as the FSCS covers you per individual.
Although the higher rates of interest may be attractive, banks outside the UK may not be covered by the FSCS.
If you wish to discuss your individual circumstances, please speak to your Old Mill adviser.