Are we forgetting savers as interest rates drop?

Mortgage rates are at the lowest rates for years which many home owners are benefiting from, however are we forgetting about the large number of savers?

Amidst the slashing of interest rates from 5% since October last year to 1% which has largely been reported on in regard to home buyers, many savers are seeing their income from their nest eggs almost disappear.

Bank of England figures detail branch notice accounts were paying an average of just 0.29% in January, down from 0.9% in December and 3.9% in January 2008. Alongside the average tax-free ISA which now provides interest of only 1.38% – a dramatic cut from the 5.06% rates that new customers were getting 12 months ago and the lowest since cash ISA’s were brought in April 1999.

These rates are of concern to those reliant on their savings providing an income who are quite often elderly or retired individuals. In addition, almost inexistent interest rates for savers provides little incentive to ‘new’ customers to save which inevitably limits the deposits that banks and building societies have available for mortgage lending.

It is with such little return on savings at present it is vital to examine and revisit the risk to your capital.

Karen Blakeman recently discussed this issue in ‘Are your savings safe?‘ referencing a handy chart from MoneySavingExpert’s article regarding ‘What counts as a ‘financial institution’?.

Karen Blakeman’s article examines the information on the protection offered by the FSCS (Financial Services Compensation Scheme) for UK savers if your bank or building society was to go into administration.

With many banks and building societies merging the general advice has been to limit your exposure from any one organisation to less than £50,000. This figure has been publicised due it being the figure one could reclaim as a maximum in compensation via the FSCS.

However, it is not as clear cut as one would imagine as two banks may have merged but could still be registered as one institutions under the FSA.

So what does this mean?

Linked banks share protection under FSCS (Financial Services Compensation Scheme) i.e. If you have money in a combination of linked banks you can only receive one amount of the FSCS £50,000 safeguard. For example, if you have £30,000 in Birmingham Midshires and £40,000 in the Bank of Scotland you would unfortunately only receive £50,000.

In contrast, NatWest and the Royal Bank of Scotland are at present registered as separate institutions under the FSA and treated accordingly by the FSCS. If both went under and you were lucky enough to have £30,000 in one and £40,000 in the other you would receive the full £70,000 under the FSCS.

To complicate matters further some banks which are now common place within the UK may not even be covered under the FSCS (Financial Services Compensation Scheme) but by ‘their’ Governments’ similarly managed scheme.

Further information can be found on FSA and FSCS web sites and is worth further investigation if you have similar circumstances to the scenarios mentioned above.

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