Putting your savings into safe hands

Published on Saturday 4 October 2008 13:42

INVESTOR confidence hit rock bottom last week, with billions of pounds of savings moving round institutions as consumers fretted over the question of how safe their money is.

And their worries are no longer confined to banks. Many are anxious about their pensions and other investments.

We try to allay their fears by looking at the strength of other financial institutions, and explaining what compensation arrangements are in place should the worst happen.

Building societies

Building societies have been among the beneficiaries of the flight to safety. Although they are protected by the same compensation arrangements as the banks, they are different in that they are owned by their customers rather than shareholders and so they do not have a share price for speculators to attack.

They are also restricted in the amount of cash they can raise on the wholesale markets, which not only limited their participation in now-scandalised securitised loans but also stopped them growing too rapidly during the last boom.

However, building societies are by no means immune from the current crisis. The Derbyshire and the Cheshire have been rocked by bad debts and are to be taken over by the UK's biggest society, the Nationwide.

Scottish societies

There are two Scotland-based societies: the Scottish and the Dunfermline. Though relatively small, at 42nd biggest, the Scottish is the fourth financially strongest in the UK.

Scotland's first building society, founded in 1848, has a free capital ratio of 9.5%, which sets it ahead of 55 competitors, and gives its 30,000 savers and more than 5,000 borrowers a solid comfort blanket. It has assets of 274m.

It made a post-tax profit of 856,000 last year, took only one property into possession and the average size of its loans compared with the properties they are secured against (known as loan-to-value) is 45%, with an average loan-to-value of 52% on new business.

Dunfermline is the UK's 14th largest society and has 350,000 members, assets of 3.3bn and a free capital ratio of 4.4%, below its peer group average of 5.9%. Repossessions are 0.78%, below the industry average of 1.3%.

But the society recently had to write off 9m on an IT project, which cut last year's profit to 2m.

High street societies

The Nationwide, based in Swindon, has 14 million savers and a million borrowers.

The average size of its loans compared with the value of the property being bought is 41%, although on new mortgages the loan-to-value is 59%. It has assets worth 179bn (191bn after the two planned mergers), and made a 781m profit last year.

During the last financial year the society repossessed 400 properties, which represented 1.41% of all repossessions, compared with its 13% share of mortgage lending.

Britannia, based in Leek, is the UK's second biggest building society.

It has 252,000 borrowers, 2.7 million savers and 35.3bn in assets. Half-year pre-tax profits were 50.9m after a 40m bad debt charge relating to specialist loans.

The next biggest society, Yorkshire, has 1.6 million savers, 211,000 borrowers and 20.5bn in assets. Pre-tax profits for last year were 54.6m. On average its mortgages represent 43% of the value of the properties they are secured against. Last year it repossessed 110 properties, or 0.09% of its loan book.

The Skipton, with 700,000 savers and 75,000 borrowers, owns estate agency network Connells and credit reference agency Callcredit. It has assets of 13.5bn, and profits at half-year were 44m.

The society had 12 properties in possession at the end of the last financial year, representing 0.014% of its housing stock. Its average loan to value is 45%.

The above were all credited with a "stable low risk of default" rating by Fitch, except Britannia, where a downgrade is possible.

Insurance

Insurance companies which provide you with any kind of insurance are fully regulated. Should one go bust, you are entitled to 100% of the first 2,000 it owes you and 90% of the rest.

These rules also cover investment plans sold by life insurance companies, as well as endowments and savings bonds, because they contain an element of life insurance.

Pensions

Personal pensions and income drawdown plans are also treated as insurance contracts, because they too include some life insurance.Again, compensation is paid in full for the first 2,000, then 90% of any remaining balance.

Annuities, which pay your regular pension, are also insurance policies and are treated as such under the compensation rules.

Sipps

Self-Invested Personal Pensions are not considered insurance contracts, and are therefore protected under separate arrangements.

These arrangements guarantee payment of the first 30,000 in full, then 90% of the next 20,000, adding up to a maximum sum protected of just 48,000.

Investments

If you lose money due to a breach of contract by a financial firm which then implodes, you can claim 100% of the first 30,000 from the Financial Services Compensation Scheme, then 90% of the next 20,000, which provides up to 48,000 of protection.