Analysis: Share the risk and play safe with your savings

In these uncertain times, it is important to focus on what you can control. So can you control whether or not a bank prospers or falls? No.

So what can you do? If you have savings of more than £35,000, make sure these are spread over more than one institution. The Financial Services Compensation Scheme will protect up to £35,000 with each FSA-regulated provider that you save with as long as they are not part of the same banking group. For example, Royal Bank Of Scotland and NatWest are part of the same group, so if you had £70,000 split between the two of them, you would only receive £35,000 in compensation.With joint accounts, between a husband and wife for example, £70,000 is protected.

What if I have investments like unit trusts or share ISAs?

With long-term investments made on your behalf, all of the first £30,000 is protected and then 90 per cent of the next £20,000. So cash savings are a safer option.

And what about shares?

Shares have always had the ability to make you stacks of money, lose it all, or fall somewhere in between. So if you have shares in a bank and it goes bust, then you will lose that money.

People who have invested with HBOS and Barclays should sit tight. Shares are about the long term and should be viewed that way. These are behemoths with an excellent track record and a diversified financial model.

The share price of HBOS and Barclays will bounce about, depending on the latest rumour or shockwave from the US, but they are strong.

What is the best option?

In these times of high inflation and uncertainty, the best option if you have any money to invest is to take the safest route possible. Some savings accounts, current accounts, fixed-rate bonds and ISAs are paying in excess of six per cent, which is what you need to be aiming for. As long as you stick to having a balance of no more than £35,000 with any one banking group, you will be safe and, generally, keeping pace with inflation.

There's little doubt that, from having little profile, the Financial Services Compensation Scheme and the role it plays has gained far greater prominence over the past 12 months.

This week's Treasury select committee report on the FSCS makes clear its support for a level of pre-funding of the levy and that contributions should vary according to how risky the Financial Services Authority feels that particular institution is. This seems a dangerous route to go down - we saw earlier in the year how ill-founded rumours almost brought HBOS to its knees. So tarring a bank with the "risky" brush could destroy consumer confidence in it, rather than helping to repair it.

If a savings provider is deemed to be more risky, will the compensation scheme be enough to overcome the concerns of savers or will these brands be disadvantaged from the outset?

The authorities need to increase the level of cover above £35,000 to further boost confidence. There is confusion about the various clauses that this scheme carries.

At moneysupermarket.com, we are increasingly seeing savers spreading their deposits to make sure they don't have more than £35,000 with any one provider.

Before Northern Rock, the notion of a bank failing was unthinkable, whereas the events of the past 12 months, and indeed the past few days, have showed us that anything is possible.

Kevin Mountford is head of banking at Moneysupermarket.com