How safe is your money if your bank should fail?

Road to Riches

by Richard Alexander

IN December 2011 an article in The Times considered potential evacuation plans for British expats in Spain in the event of a financial collapse in the Spanish banking sector.

The story was very quickly dismissed by the British Consul in Madrid but earlier this month, the Financial Mail on Sunday looked again at the concerns and potential contingency plans to ‘fend off public fear’. The article appeared on April 1.

Whether any such contingency plans exist, or not, is open to speculation.

But what is very clear is that the financial crisis in Europe is far from over and it would make total sense for individuals to make sure that they have their own house in order, with possible contingency plans in case things go badly wrong.

After the run on Northern Rock, resulting in the UK Government stepping in followed by the complete failure of Lehman Brothers, people became a lot more aware of the need to consider investor protection and started to spread their money on deposit.

However I doubt the same care is being taken today, less than four years later – and it certainly should be!

While the guarantees with British banks are now £85,000 per investor, or £170,000 for a couple, you need to be sure that if you divide your savings between two banks they are not part of the same group as they may share the same guarantee.

In Spain, the deposit guarantee scheme covers up to 100,000 euros but unlike the UK, in the case of joint account holders, the limit is shared between them.

So where do you keep your savings and do you know how well you are protected if the bank should fail?

Moreover, it is not only the banks that need to be considered.

With many people holding their capital in collective investments, what financial security do they achieve?

In the UK, there is the Financial Services Compensation Scheme to step in if all else fails, but even if you are an expat Brit with UK investments, unless you were UK resident at the time you set up the investments with a UK institution, the compensation scheme will not help you.

It makes a lot of sense to review your financial plans periodically in any event, but if you have not reviewed just how secure your investments are, you should consider doing so without delay.

The financial strength of the organisation you are invested with is the first question to raise, and then you should look beyond it to see what protection there is, if any, in the event of its failure.

The old ‘eggs and baskets’ maxim is worth remembering too.

While considering financial strength, this is also a good time to think about the currency you are invested in and how well your money is sheltered from tax.

All tax authorities are looking at ways to be more tax efficient in terms of the amount of tax they can collect but there are many examples of people paying much more tax than they need to.

Never mind governmental contingency planning – get your own house in order and you won’t need their input even if the situation does deteriorate.

Richard Alexander Financial Planning Limited is an appointed representative of L J Financial Planning Limited which is authorised and regulated by the Financial Services Authority in the UK. Contact him at Richard@ra-fp.com