Savings accounts pitfalls

At a time of financial uncertainty, with household names like Bank of Scotland facing a run as panicked savers withdraw their money, it is important to take a rational approach and ensure that your personal savings are protected and will remain accessible in case of a crisis.

One of the most important principles in managing finances is to avoid having all your eggs in one basket. While most financial companies will encourage you to have various accounts with them and it may be convenient to work with just one company this can cause huge issues if that company subsequently fails. Some of the risks may not be immediately apparent, so here is a list of things I've found myself having to consider this week.

Insured maximum
In the UK, the Financial Services Compensation Scheme guarantees your savings up to a maximum of £35.000 with each institution. It's important to note that the guarantee is not per account but rather per institution and that some institutions trade under multiple names. For example Halifax, Bank of Scotland and Intelligent Finance are all part of HBOS and if you had a combined total deposit exceeding £35.000 across these three then you would be exposed to loss and should move part of the money. If in doubt check the FSA registration number to ensure it's not the same parent company.

Access to funds
If you have all your savings with a single company and they go under you may find yourself in short term difficulty. While the government guarantees your savings up to the maximum of £35.000 it may take several months to pay out. It is also well to remember that the guarantee is untested and unfunded, relying on a levy of the financial companies (capped at 4 billion, which is insufficient to cover any of the top banks failing) or a Bank of England loan to fund payouts. Splitting your savings across multiple financial institutions ensures that one company failure does not leave you cut off from all your funds.

Credit offset against debt
This is in my opinion the killer argument against offset mortgages but also well worth considering for any other debt you may have. If you have both savings and debt with a bank that fails then the government guarantee will only pay out whatever savings are left after paying off the loans. Thus when savings and loans are held with the same bank it would result in zero payout if the loans are of the greater value. If you are dependent on access to your savings this could be catastrophic, essentially you would be making a forced repayment and be left with zero liquidity at a time of crisis.

Restrictive terms and conditions
Kaupthing offers an excellent interest rate on savings, but on reading the T&C document I noted that they reserve the right to refuse withdrawal requests for up to 60 days. Thus if a run developed on the bank they could prevent you from withdrawing your money for 60 days, after which if they failed it could be another 60 days before the government guarantee paid out. Four month with no access to funds and likely zero interest paid is not an attractive proposition.