Cold news from Iceland, but your money can still be kept warm

Cold news from Iceland, but your money can still be kept warm

The move follows reports in the media suggesting that savers should be wary of putting too much of their money in Icelandic banks after a credit ratings agency described them as 'fragile'. Both Icesave and Kaupthing Edge are among the leading savings account providers in the UK at the moment, and both are based in Iceland.

However, as with other banks based overseas, including those in Ireland, savers are covered by the UK Financial Services Compensation Scheme (FSCS) up to certain limits.

'If a bank is authorised by the Financial Services Authority, which the Icelandic banks are, then savers automatically have recourse to the FSCS,' says a scheme spokesman. 'The only exception is where the originating country's own government operates a more generous scheme, such as in Italy, in which case it makes sense for them to opt out of the scheme.'

The FSCS protects the first £35,000 of any savings if a bank or building society goes bust, and in the case of trouble with an overseas bank the FSCS says it would work in one of two ways. It would either pay the full amount to the saver and claim back a proportion from the bank's domestic compensation scheme (in the case of Iceland, up to around £16,000), or would pay the top-up to the country's scheme. The FSCS.....continued below

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Icesave had kept its rate at 6.3 per cent following the first quarter point rate cut in December, but as of last Friday the rate fell to 6.05 per cent. The bank emailed customers to tell them of the change, suggesting they take the opportunity to open a fixed-rate savings account paying 6.7 per cent.

Fixed-rate savings are looking increasingly attractive as more banks and building societies prepare to cut what at the moment are the best interest rates in seven years.

'These accounts offer good value at present, and once you've signed up you will not be hit by the further anticipated downward fluctuations in base rate,' says Rachel Thrussell at Moneyfacts.

Last week Nationwide and Abbey each launched fixed-rate accounts paying 6.25 and 6.3 per cent for one year respectively, but there are better rates on offer. The top short-term fixed-rate account pays 6.75 per cent - from Anglo Irish bank and West Bromwich building society - compared with the best instant access account, which pays 6.55 per cent, also from West Bromwich. And savers who lock their money away for the short term - six months to a year - will enjoy better rates than those who fix for longer.

'Since the credit crunch kicked in, it is short-term money the banks are after,' says Susan Hannums of AWD Chase de Vere.

Fixed-rate savings accounts, or fixed-rate bonds, offer such attractive rates because savers' access to their money is restricted. Anyone using the accounts has to put in a lump sum at the start which cannot be topped up, and in most cases withdrawals are prohibited. Some accounts do allow access, but this comes with a hefty penalty, such as 180 days' loss of interest. Leeds building society is rare among providers in that it does allow access to 25 or 50 per cent of the money in most of its fixed-rate savings account without penalty.