The landscape for British savers shifted, it seemed, almost by the hour last week. From the failure of Landsbanki and its Icesave deposit arm to the dramatic bailout of British banks, savers could have been forgiven for wondering whether they were coming or going. However, one question probably dominated their thoughts: how safe is my money?


If anything, the position over government guarantees is even less certain than it was following the Icesave failure. The Government stepped in on Wednesday to guarantee individual customer deposits in the Icelandic internet bank – although not those of local authorities – regardless of size. And Lord Turner, head of City regulator the Financial Services Authority, was correct in arguing last week that "not one individual saver has lost a penny since this thing [the credit crunch] started".

However, the official guarantee for deposits is still set at £50,000, or £100,000 for a joint account. As a result, it is unclear whether the Government will choose to lift that limit or stick strictly to it in the event of another banking collapse.

"During the early part of last week we saw a quiet run on the banks, with depositors moving their money out into Post Office accounts or National Savings, or even just keeping it at home. The Icesave measure, combined with others taken last week, should hopefully stop this," says Jasmine Birtles from financial advice site Moneymagpie.com. "But while the decision to refund Icesave customers was welcome and should help to restore some confidence, we need to know what will happen if a bank fails again,"

Interestingly, National Savings felt the inflows of cash were so healthy last week that it lowered the interest rates on some of its key accounts. Meanwhile, Northern Rock, now a fully nationalised bank, has virtually shut its doors to new savers. This way, neither organisation can be accused of actively trying to attract saver cash from the troubled high-street banks.

The eventual compensation bill for Icesave could be as high as £4.5bn, which would make it the biggest payout in the history of the Financial Services Compensation Scheme. "You have to ask: if there were any further calls on the FSCS, how much more could it reasonably fund? What is already pledged is coming from government coffers – which means taxpayers," says Andrew Hagger at information website Moneynet.co.uk.

Disturbingly, Icesave, although a high-profile new entrant to the UK savings market, was only a bit-part player. If one of the really big names were to go belly-up, the consequences could be a lot worse.

What's more, even if the compensation scheme were to work under such duress, savers might be surprised that there is a big caveat to the compensation regime. "If a bank goes insolvent then the practitioner sorting out the mess will offset your credit balance against your debt," adds Mr Hagger. "This means that if you have savings and a mortgage with the same bank and it goes under, you will only get back whatever is left after your savings have been used to meet the mortgage debt." So, for example, a customer who has savings of £50,000 and a mortgage of £100,000 with an insolvent bank could actually end up owing £50,000 to the receiver.

But a UK banking insolvency is unlikely, say the experts, as the Government offered last week to shore up the balance sheets of seven big banks and the Nationwide building society. "We have to believe the plan will do the trick and British banks are healthy enough now that they are protected from insolvency," says Ms Birtles.

Nevertheless, financial advisers are urging people to spread their money between providers to keep below the £50,000 limit. "No one wants to take risks and we are definitely advising clients to spread themselves around," says Keith Churchouse from independent adviser Churchouse Financial Planning. "Another thing people need to be aware of is to avoid having more than one account with the same banking group, as they will only be entitled to a single £50,000 limit. For example, people with £100,000 spread between Birmingham Midshires and the Halifax will only be covered up to £50,000 as they are both part of HBOS."

In the same vein, and in light of the Icesave collapse, Mr Churchouse suggests savers steer clear of foreign- owned institutions: "The system of passporting – whereby foreign banks are allowed to trade in the UK because they are regulated at home – needs to be reviewed urgently. It has clearly failed with Icesave and what is the point of receiving a bumper rate of interest if the bank goes and collapses and you can't get your money back?"

Instead Mr Churchouse advises people to stick to the long-established British banks, the biggest of which can now call on the Government for funding under the deal that was announced last week.



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