Protecting your savings from harm

Protecting your savings from harm

Did you know that on January 1st 2016 the deposit protection limit is changing from £85,000 to £75,000? Perversely perhaps, the reduction is due to the strength of the pound because the protection sum is linked to €100,000 and changed every five years.

There is a new ‘temporary high balance’ protection of £1m. This has been in place since 3rd July 2015. It states that if you have money in an account specifically from a life event e.g. inheritance, house or business sale, insurance pay-out or redundancy, it is now covered up to £1m for six months. A valuable extra protection.

You may already have £85,000 in a savings institution that’s right for you, and if you do your maximum exposure is £10,000 (and even in a fixed account you’re allowed a window to withdraw that to get it down to £75,000). For you to be at risk of losing money a number of bad events all have to happen.

The institution needs to go bust, and that is unlikely as we’ve seen the government nationalise major banks rather than see that happening (the ‘too big to fail’ argument). No guarantees this time round though.

If it has gone bust, the government needs to decide not to simply transfer that bank’s savings book elsewhere as it did with Bradford & Bingley and others (during the 2008 crash this was its preferred strategy).

If it has gone bust, and the government isn’t transferring the savings book, even then we have seen in the past the government pay the entire amount out, even beyond the guarantee, as it did for all savers with Icesave (the only private individuals who lost money there were those who saved offshore).

Whether it is worth your effort, energy and time (and shoe leather) to change several accounts depends on your attitude to risk and the rate on offer. It is a question of balancing how much you spread and the interest you earn. No one can answer that risk balance for you but it is worth asking yourself.

For the sake of theory let’s imagine someone sold a house worth £1 million and has the money paid straight to their regular high street account, and they need protection for longer than six months. They could try and find 13 different UK financial institutions and give them each £75,000. But that’s not going to happen because they would quickly run out of tried and tested banks that they are comfortable with, or have even heard of before. And can you imagine the confusion that would cause at home, let alone the paperwork and reams of client identification paperwork required.

Diversification can help though, because you reduce the risk event of losing all your money in one extreme event. And then there is the NS&I, which like the Financial Services Compensation Scheme (FSCS) is government-backed. The NS&I website states “Because we are backed by HM Treasury we can offer 100% security on every penny invested”.

In summary, be aware and be prudent. There are good options for cash deposit, but if in doubt, speak to us at Capital.

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