Q&A: How to save safely

Last year, the collapse of several major financial institutions caused thousands of people to ask: how safe are my savings? Now, another building society's brush with disaster and Santander's decision to rebrand its British banks raise new questions about who we can trust with our rainy day funds.

Just a few short years ago, it might have seemed inconceivable that a bank or building society could collapse.

Sadly, we all know better these days. Since the start of the credit crunch, the demise of big name institutions including Northern Rock, Lehman Brothers, Kaupthing Edge, Icesave and Bradford & Bingley has seriously shaken people's confidence.

This month, West Bromwich Building Society managed to reach a deal with creditors and preserve its independence after intense speculation that it would need to be broken up or bailed out by the taxpayer. However, the society's brush with disaster acts as a timely reminder that it's too early to assume our financial institutions are 100% stable.

What's more, Spanish bank Santander's decision to re-brand Abbey, Alliance & Leicester and Bradford and Bingley - all British banks it has purchased during the downturn - has implications for how much cash new customers will be able to stash in their savings accounts.

So, what's the latest on how to keep your savings safe?

First of all, it's important to be aware that not all kinds of savings are protected by the government. In this article, I'm going to explain the rules surrounding cash savings in bank accounts, building society accounts and ISAs - but if you hold investments, a pension or have a life insurance policy, you can find out about what protection you're entitled to by visiting the Financial Services Compensation Scheme (FSCS) website, www.fscs.org.uk.

As far as ordinary savers are concerned, the FSCS offers £50,000 worth of protection per individual, per financial institution.

In theory, this means that if you held £100,000 in savings with a single financial institution, only half of your money would be protected if the organisation collapsed.

The financial institutions covered by the FSCS must be registered with the Financial Services Authority (FSA) - so deposits with banks, building societies and credit unions are protected.

However, if you're saving through any other kind of scheme (for example, a loyalty stamps plan) the money you put into it will not be covered by the FSCS.

Unfortunately, no. The crucial question all savers must consider is exactly what counts as a financial institution.

Nowadays, many of the high street's biggest banking brands are linked to one another and share their FSA registration - but you'd never know it from looking at them.

However, this is important because, with only one FSA registration between them, some groups of banks count as a single financial institution under FSCS rules.

In this situation, a saver who had deposits with three apparently 'different' banks would be eligible for only one £50,000 dose of FSCS protection.

Therefore, in order to achieve the maximum level of protection possible for your cash, it's crucial that you ensure you know which banks are in bed with one another.

Most banks and building societies make their FSA registration numbers clear on their websites.

If two banking brands share the same registration number, under FSCS rules they will count as one institution.

Only the first £50,000 of an individual's savings within the institution - however many accounts their cash is held in - would be guaranteed.

Below is a guide to which of Britain's biggest banking brands are linked together as single institutions. However, please note that referring to this table is no substitute for researching the safety of your own savings.

* If you had savings with any of these institutions before they became connected in the groups shown here, you will have £50,000 worth of FSCS protection for each different account until the end of 2009. In 2010, a permanent solution to the issue of how these groups will be FSA registered should be found. New savers with banks or building societies that are now grouped together are already entitled to just £50,000 worth of protection in total, no matter how many accounts are held with its different brands.

Spanish giant Santander currently owns all the banking brands in group N, above. It also owns Alliance & Leicester.

As you can see, Alliance & Leicester isn't listed in the table. This is because it currently operates under its own FSA registration.

This means savers could safely hold £50,000 in accounts with both A&L and, for example, Abbey or Bradford & Bingley.

However, Santander recently announced it intends to re-brand all its British banks with the Santander name. Once this has happened, it's likely all new savings with any of Santander's banks will be protected under a single FSA registration - so if you stashed £50,000 in an A&L account after the re-branding, you couldn't then save an additional £50,000 with Abbey in 100% safety.

If you hold a joint account with any financial institution, remember: both individuals are entitled to £50,000 worth of protection under the FSCS.

This means a couple with £100,000 of savings with a financial institution would have the full amount guaranteed under the scheme. Any savings above this amount, however, would not be protected.

If your savings provider isn't a British-based company, your money may be protected in a different way.

Some countries offer savers less protection than the FSCS, in which case some of your money would be guaranteed overseas. The remainder of your cash (up to the £50,000 limit) would be covered by the FSCS.

In the case of countries that offer more protection than the FSCS (such as Ireland and the Netherlands), 100% of your savings would be guaranteed by their own compensation schemes.

This second point affects savers with the Post Office, as it is operated by the Bank of Ireland. It also affects ING Direct customers and those whose Kaupthing Edge accounts were taken over by ING Direct in 2008.

After the Icelandic bank Icesave collapsed last year, the Chancellor, Alistair Darling, stepped in to help savers who'd stashed more than £50,000 with it.

He guaranteed 100% of customers' cash even though FSCS rules didn't promise this - and it's led many people to question whether the FSCS's £50,000 limit would ever actually be imposed.

The truth is, there is no way to know. However, it's certainly dangerous to assume that the government would step in to help you if you didn't take responsibility for saving safely.

Hopefully, very few of us will ever experience the stress of hearing our bank has gone bust. However, if you make sure you keep a maximum of £50,000 with any financial institution and always ensure you know how your money is protected, your cash should be safe if the worst does happen.

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