Finding a safe cash haven

By David Thurlow, director Atkinson Bolton Consulting Limited

Since the start of the modern media age, we haven't seen anything quite like the run on Northern Rock.

The pictures of long queues of depositors waiting patiently to withdraw their life savings made the most impressive headline, but the amounts withdrawn by panic-stricken online investors was probably even more relevant to its eventual fate. The Northern Rock was of course nationalised and depositors were provided with a 100% UK government guarantee that their deposits were safe.

In terms of guaranteed protections, Northern Rock depositors remain the best protected of all UK savers with that 100% state guarantee still in place. If a UK saver wants absolute security rather than the best rates, this, or National Savings, has to be the best option, since it avoids the necessity to spread money around a number of accounts.

In theory, the next best protected savers are those with accounts in the main Irish banks, or in specified named subsidiaries of those banks. Peculiarly, this includes savers in the Post Office, whose accounts are actually provided by the Bank of Ireland. However, any guarantee is only worth the paper it is printed on, and there has to be a real question mark as to whether the Irish government could afford to meet its guarantee obligations in the event of a major failure of an Irish bank. This risk is heightened because the very provision of this guarantee led to massive sums of money flowing into Irish banks at the end of last year. On the one hand, this increase in the deposit base should make Irish banks more secure - on the other hand, it increases the potential cost to the Irish government in the event of a failure.

For other UK based banks, the picture is more complex. For maximum security, the only option is to ensure that a maximum of �50,000 per individual is held with one authorised institution. This is the amount covered by the Financial Services Compensation Scheme. For joint account holders, this means that up to �100,000 is protected (assuming no other accounts are held with the same institution).

However, for anyone holding a number of accounts to gain this protection, there are traps for the unwary. Take Lloyds Banking Group, formed from the merger of Lloyds and HBOS, for example. Lloyds TSB, Lloyds TSB Scotland and Lloyds TSB Private Banking may share the same name, but each is a separately authorised institution, so �150,000 split equally between the three would be protected in full. Cheltenham & Gloucester shares the same authorisation as Lloyds TSB, so only half of �100,000 split between C&G and Lloyds TSB would be protected.

Money held with Bank of Scotland is protected separately to that with any of the above named banks, but if you have more than �50,000, in total with any of Bank of Scotland, Halifax, Birmingham Midshires, St James Place Bank, Saga, Intelligent Finance or Capital Bank, only �50,000 is protected.

It makes sense to spread cash deposits between a number of banks. The likelihood of a major bank collapsing may be reducing because of the gradual recapitalisation of these institutions but the consequences of a collapse could be catastrophic for anyone with over �50,000 in cash - it just isn't worth taking this risk given the meagre interest on offer. Indeed, those with large sums of cash may wish to consider investing some in other areas where capital may be at risk in the short term but where the interest payable is significantly higher than cash and the long term returns much more attractive.