The Financial Services Compensation Scheme (FSCS) has confirmed that save as you earn share plans are covered by the scheme. You should bear in mind that if your savings in such a scheme are held in a bank or building society they will count towards your total £50,000 compensation limit with that institution.

These days it is important to remember that the FSCS also protects investments. After all, cash is likely to offer less attractive returns now that interest rates are coming down. Now it might be said that cash is a risk – could be time to look at fixed income products.

The Financial Services Compensation Scheme (FSCS) will, from 7 October 2008, cover the first £50,000 of your savings.  This change has been planned for some time and has clearly been brought forward to limit the panic amongst jittery savers (myself included).

There is talk of simplifying the rules too, which would be helpful.  In the meantime, here’s a full breakdown on the FSCS website about the compensation limits.

Also, don’t forget that if you have a joint account you are covered up to £100,000 per institution.

I recently wrote about the ability to protect your savings by taking an offset mortgage.  My mortgage broker friend has just given me an update to clarify the situation.

If you hold savings and debt (mortgage, loan etc) with a single institution then it is your NET position which is used to determine what you owe or are owed should the bank collapse.  This is not a feature of offset mortgages in particular but I mentioned them because the interest you save is tax free which is a nice bonus.  Anyway, here’s an excerpt from Barclays website:

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory fund of last resort for customers of authorised financial services firms. Among other things, the FSCS protects customer deposits with authorised financial services firms. Barclays Bank PLC is an authorised financial services firm and so our customer’s deposits are covered by the scheme. The maximum level of compensation payable under the scheme for deposits is £35,000 per person. The level of compensation is effective since the 1 October 2007.  If a bank were to go into default, the FSCS would consider the overall net claim.

This means that if the claimant’s borrowings exceeded his/her savings, there would be no overall claim against the bank, and the claimant would not be entitled to any compensation. For example, if a customer had a mortgage of £200,000 and savings of £150,000 with the same bank, set-off would be applied As a result, the individual still owes the bank £50,000. There would be no positive balance and no claim. If, however, the savings exceeded the mortgage, the compensation rule of £35,000 would come into play.

So there you have it from the horse’s mouth.

There’s been so much interest in protecting savings that I had to mention this little known fact that provides 100% protection for savings.  First, I have to admit that I had not thought of it until my mortgage broker friend, Scott, mentioned it to me.

As you probably know the Financial Services Compensation Scheme (FSCS) covers bank deposits up to a maximum £35,000.  Now, if you have £100,000 saved, how do you protect that?  Some of you will spread it across 3 institutions with different savings accounts and that’s one method.  What if you have £350,000 saved though – are you going to open 10 different accounts?  Possible but annoying.

At the risk of getting sidetracked… one other thing to mention about the FSCS before I go on – although your money is safe, how long will it take to get back?  The wife of a friend of mine made a claim and got her £5,500 back but it took five and a half years!  Admittedly this was a good few years back but who’s to say they’re any quicker now?  And there was no interest paid on the £5,500 over that time.

Here’s how to get 100% protection for savings: take an offset mortgage and put the savings you want to protect in that account.  Offset mortgages work by offsetting your savings against your debt so as an example if you have a £300,000 mortgage and £100,000 savings then you only pay interest on £200,000.  Now, consider the mortgage rate (aside: I bet many of you are uncertain as to your exact mortgage rate at the moment!) as your savings rate since you are saving that interest on your mortgage payments.  It gets better too – as you are not actually earning interest but rather saving interest you would otherwise pay there’s no income tax to pay on it!  Tax free savings with 100% protection?

If your mortgage rate was 6% then this is the equivalent of a savings rate of 10% net of 40% income tax and for lower rate tax payers it’s still a very reasonable 7.5% net.  Where else can you get rates like that? And, because most offset mortgages let you take money back out as you need it you still have instant access to your cash.

Frankly, I’ve always been a fan of offset mortgages so I’m bound to like this but there is a potential downside too.  If your mortgage lender were to go bust – and given recent government action over Northern Rock and now Bradford & Bingley that seems very unlikely – your savings would be offset against your mortgage to reduce your debt rather than giving you cash back.  In other words, you’re forced to use your savings to pay off part of your mortgage.  But actually that would happen anyway if you had both savings and debts with a bank that went bust so it’s not a particular problem of offset mortgages.

So there you have it – 100% protection on your savings.

In recognition of my friend’s help in bringing this to my attention (and of his skill as a mortgage broker) I’m giving a link to Scott’s profile.

UPDATE 2 – Iceland suspends trading in financial company shares

UPDATE – In the last few days I have moved my personal cash out of Icelandic banks.  That’s not a recommendation for you, just what I’m doing.  The article below was written about a week ago and this one ‘How to get 100% protection on savings’ was written yesterday.

Lots of people have been asking me recently if it is safe to save with Kaupthing Edge so I thought I’d do a quick post on that single topic.  First, I have no doubt that the reason you are all asking the question is because the interest rates paid by Kaupthing are excellent (at least at the time of writing) and you actively want to save with them – otherwise I would say just put your money in National Savings and Northern Rock (see my previous post Are your savings safe? to see why).

The most important thing to remember is that Kaupthing Edge are fully covered by the UK’s Financial Services Compensation Scheme. Under this, all your savings are guaranteed up to £35,000. However, if you put your account in joint names (assuming your partner won’t run off with your cash) then you are jointly covered for £70,000.  You’re not getting extra protection, just each person’s protection added together.  Also, remember that the compensation scheme is per institution, not per account.

So the fact is that you are covered up to £35,000 by the compensation scheme but what if lot’s of banks go bust – is there enough money in the scheme to protect everybody?  No, there isn’t enough right now but the government has pledged to loan the money to the scheme in order to meet any protection requirement.

So with all this protection in place you may wonder why the fuss?  The original worry over Kaupthing came about partly because earlier this year the credit rating agency Moody’s described the Icelandic banking system as ‘fragile’.  The problem is that Iceland’s banks were hit hard as the credit crunch arrived. Being based in a nation of just 300,000 people with a pretty small economy has led them to rely largely on the troubled money markets rather than customer deposits.  Kaupthing and Landsbanki both opened Internet banks to attract customer deposits and reduce their dependence on capital markets.  The price an institution needs to pay for money on the market is a pretty good way to guage how the city insiders view the risk it represents – there’s a really good article on it at Moneyweek.

IceSave, part of Icelandic bank Landsbanki, operates under the passport system to the Financial Services Compensation Scheme, where they run the equivalent of a UK branch from their home country.  This gives them European Economic Area authority rather than FSCS authority.  If the bank went bust you would have to make a claim to the Icelandic compensation scheme rather than the UK one.  Iceland pays a maximum compensation of around £16,300 (depending on exchange rate with the Euro) then any sum over this up to your £35,000 maximum would have to be claimed through the UK system. In other words, you’re still covered but it’s more complicated.  Oh, and the system’s never been tested.

The long and the short of it is that you will have to decide whether the additional interest earned at Kaupthing Edge is worth the risk.  Personally, I prefer safety.  If you want complete safety just go for National Savings or Northern rock.