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the sky is not falling in…

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…or why you shouldn’t be worried about your savings account.

I already know that you’re all nice sensible people, busy savings and investing towards a fun and exciting future. In the wider world I suspect that not everyone has a positive net worth, or even an emergency fund. Which is why I find the vast amounts of discussion over the insurance/compensation scheme for deposits confusing.

Currently, in the UK 100% of the first £35k is covered by insurance. This limit applies per individual, per bank registered with the FSA. Joint accounts are counted as belonging in equal shares to each account holder.

Now, lots of people want this protection to be extended to £50k. I’m not particularly opposed, but I am asking why it’s seemingly so incredibly important to lots of people.

Many people are up to their eyeballs in debt anyway. Aside from possibly a small emergency fund (well under £35k) they should probably be putting their spare cash into paying off what they owe more quickly. In any case, 96% of deposits fall under £35k.

Moreover, if you have more than £35k in a savings account in a bank, whilst you’re clearly doing something right, how hard is it to switch some of that money over to another account in a different bank, if you’re worried about bank failure?  (By the way, the answer is *not very*.)

If, say, you have £40k with HSBC, why not move some to say Kaupthing Edge, an Icelandic bank that’s fully insured, and also has currently the best instant access rate on the market at 6.55%?

The only, very tiny, potential pitfall in the plan is that some banks are owned by the same group, (like Halifax and the  Bank of Scotland) and so even though they have different names, they count as the same bank. This handy guide from moneysavingexpert.com will tell which these are.

Despite a couple of high profile takeovers, there are still loads of banks in the UK so you could put away in the region of £3m with full protection. Which is a lot of money.

So, unless I’m missing something, I can’t think of a particular reason why it’s vitally necessary and important to increase the level of protection, other than reassuring a bunch of people who probably don’t even have all that much money saved up anyway.

Let’s not forget that the government / Bank of England / FSA haven’t actually let a bank fail yet anyway.

The sky is not falling in on your savings account.

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6 comments for “the sky is not falling in…”

  1. In the future, there will be no need spit the 40K between kaupthing edge and Hsbc, you will be about to put the whole 40K into a Kaupthing Edge saving account and your investment will be safe. As Gorgon brown is due to announce an increase in the compensation limit from 35k to 50k for banks covered by the UK Financial services comensation scheme.

    Posted by philips dame | October 2, 2008, 12:03 pm
  2. Yes, but there’s a point at which your money becomes uninsured.

    Posted by plonkee | October 2, 2008, 3:16 pm
  3. “I am asking why it’s seemingly so incredibly important to lots of people.”

    Here in the U.S. depositors only had 50% of their deposits over $100,000 covered in the IndyMac bank failure.

    Plenty of business owners got caught.

    $100,000 is not a lot when you’re using one bank account to run your business - expenses, inventory, payroll, etc.

    It seems almost certain that part of the federal bailout bill will be to raise the insurance limit to $250,000.

    Posted by Bill in NC | October 2, 2008, 9:42 pm
  4. I think the government shouldn’t protect any deposits at all! Let’s get the cash out and into the economy.

    Posted by Uncommonadvice | October 3, 2008, 4:41 pm
  5. Great post !

    Posted by Roger Hamilton | October 5, 2008, 2:44 pm
  6. It is nice to read this kinds of posts. You can never hear about how your money is perfectly safe too many times, I think anyway. I do not have £35k in my emergency fund, but I might move it over to Kaupthing Edge saving account anyway just because of the interest!

    Great post Plonkee!

    Posted by Maggie | October 7, 2008, 2:01 pm

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