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- Best accounts for long term savings
The security of our savings is back at the forefront of many consumers' minds following the renewed turmoil in the banking sector and concerns about the stability of institutions such as Halifax Bank of Scotland and Bradford & Bingley.
So where can you put your hard-earned money and ensure that it is totally protected?
What are the risks?
It is important to remember that no British saver has lost any money as a result of the financial crisis, but understandably many are increasingly nervous about what would happen were a bank to go bust.
For the majority of savers however, there is little reason to be concerned. The average savings account in the UK holds £9,000 - and this is fully protected under the Financial Services Compensation Scheme (FSCS). The FSCS guarantees that if a savings provider collapses, £50,000 per person held with any one financial institution is guaranteed (up from £35,000 - Gordon Brown announced the increased recently).
As the rule applies per person, if you have a joint account you're protected up to £100,000. For more details about the FSCS read our article, 'How to keep your savings safe'.
However, the situation becomes more complex if you have more than £50,000 in savings. If you are fortunate enough to be in this position, the key is to spread your money around between different providers, as the £50,000 protection cap from the FSCS applies to the institution, not to the account.
And some institutions offer accounts under different brand names, but they all share the same registration with the Financial Services Authority, which means that even if you have accounts with different providers, you still only benefit from £50,000 of protection.
Which accounts should you opt for?
The good news is that with savings rates at their highest level for years, there is plenty of choice so you can get the diversification you need without having to sacrifice returns.
The eagerness to capture new cash was exemplified recently when the Royal Bank of Scotland (RBS) group launched a new range of savings accounts including two leading cash Isa products. The Natwest Cash Isa pays between 6.67% and 7.32%, while RBS' Instant Access Cash Isa pays between 6.25% and 7.25%.
Indeed individual savings accounts (Isas) should be the first port of call for your savings as they are tax-free investments. You can invest up to £3,600 into a cash Isa every tax year and whereas with a normal savings account higher-rate taxpayers pay 40% on any savings interest, while those in the basic-rate band pay tax at 20%, there is no tax levied on the interest you receive from a cash Isa.
However, where the Natwest and RBS deals really score, is the fact that you can transfer Isa money invested in previous tax years - many other leading Isa rates are only available for this year's tax allowance.
In fact, the Natwest and RBS products are only worth considering if you have money to transfer from other Isas as the rates include a 2 percentage point bonus which runs for 12-months, which you only get if you make a transfer. If all you are looking to do is invest this year's allowance you would be better off with the HSBC Cash Isa which is paying 6.25%.
What about the rest of your money?
Because you can only place £3,600 into a cash Isa each year (this rose from £3,000 in April), many UK consumers will have additional savings in standard accounts. If the amount you have saved in such accounts exceeds £50,000 look to spread the risk between different institutions.
The £50,000 protection cap from the FSCS applies to the institution, not to the account. And some institutions offer accounts under different brand names, but they all share the same registration with the Financial Services Authority (FSA), which means that even if you have accounts with different providers, you may still only benefit from £50,000 of protection. A good example of this is the HBOS group.
It has a single registration with the FSA but has a number of savings brands: Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance and also provides savings accounts for The AA and Saga.
Therefore, there is no point in having accounts with say, Halifax, Birmingham Midshires and Saga as you will only have £50,000 of protections. So as well as spreading your money between different accounts, you need to ensure they are with institutions that each have their own FSA registration.
So what account combinations should you choose?
If you have money you won't need to access, fixed rate bonds are worth considering as, with the exception of the new Isas from RBS group, they offer the highest rates of interest.
The AA has just launched a new one-year Fixed Rate Internet Bond paying a market-leading 7.21%, while ICICI Bank's Hisave Fixed Rate Account and Kaupthing Edge's Fixed Term Deposit Account, both of which have one year terms, are paying 7.20% and 7.15% respectively. Despite being foreign banks (ICICI is Indian-owned, while Kaupthing is an Icelandic bank) both institutions are signed up fully to the FSCS, which affords you the same protection as if it were a UK bank.
So you could spread your cash among these three institutions and have £105,000 of savings totally protected. Icesave and Anglo Irish Bank, which both offer rates of 7.06% on their Fixed Rate Savings Account and Nine Month Fixed Rate Bond respectively, are slightly different in terms of the protection you receive.
For these providers, the European passport scheme applies - meaning that if the institution fails you have to claim through the compensation scheme of the bank's country of origin first and them claim through the FSCS if that scheme doesn't cover you for £50,000. While this may seem more of a hassle, it could actually work in your favour if the bank's country of origin offers a more generous compensation scheme.
Anglo-Irish Bank is a perfect example. The Irish government last week increased the level of protection its deposit guarantee scheme from €20,000 to €100,000 (about £78,000) making Anglo-Irish Bank's accounts a very attractive home for those with large amounts of savings.
What if you require easy access?
You won't want to lock all your money away in a fixed-rate bond and should look to have some in an easy access account so you retain some flexibility (fixed-rate bonds don't normally allow you to make withdrawals during the fixed term and you can usually only deposit a single lump sum at the time the account is opened).
Easy access accounts are consequently the most popular type of savings account as they allow you to move money in and out at any time. Alliance & Leicester (A&L) has launched a new account.
Its eSaver Issue 2 is paying a market-leading rate of 6.60% on balances of £1 or more and the rate is guaranteed to be at least 0.5 percentage points above Bank rate until February 2010.
However, this account pays no interest in any month a withdrawal is made, with the exception of July, so this is not the best account if you will need to dip into your savings regularly.
There are a number of other accounts paying more than 6.50% so you still have plenty of choice if you are looking to spread your money between different institutions.
The West Bromwich Building Society Stratus No Notice Account pays 6.56%, while the Kaupthing Edge Instant Access Savings Account has a rate of 6.55%.
Other leading rates include Birmingham Midshire's e-Saver Account (issue 2) at 6.52% and Bradford & Bingley's Internet Saver 3 which has a rate of 6.51%.
Heritable Bank's Online Saver is paying 6.51%, while ING Direct and Capital One both have accounts paying 6.50%. However, these three accounts all include one-year introductory bonuses so the rates become much less competitive once these end and you should make a note to move your money to alternative accounts, when the bonus periods expire.
What if you want all your money in one place?
While you can protect large amounts of savings by spreading your money around between different providers, there are two homes for your cash which offer unlimited guaranteed protection. Northern Rock and National Savings & Investments (NS&I) are both Government-backed giving savers total protection.
So if you are very cautious you may prefer opting for peace of mind and opening an account with one of these providers. However, with the exception of NS&I's index-linked savings certificates, the rates available from either institution are not the best, so this protection does come at a cost.
NS&I actually reduced some of its savings rates recently and its Direct Isa is paying 5.30% which doesn't look that great in comparison with some other deals that are available. And Northern Rock's highest-paying fixed rate bond has a rate of 6.0% - 1.21 percentage points lower than the new AA fixed rate bond - while its Esaver is paying 5.75%, considerably less than the leading easy access accounts.
In summary...
Therefore, despite the current uncertainty in the financial world, even those with large amounts of savings can take steps to ensure their money is protected. And even though you can get unlimited protection from Northern Rock and NS&I, it is well worth doing some financial planning and splitting your money between providers to maximise both protection and returns.
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