protect your savings!...

Glass-house or Safe-house, there’s more to consider than just a bank account!

Q. The entire financial world seems to be imploding due to the global "credit crunch", those affected include Northern Rock, Bradford and Bingley, HBOS, Merrill Lynch, Lehman Brothers and AIG to name but a few.

What or who will be next and how can we protect our hard earned savings?...

A. In the words of Alan Greenspan, the former chairman of the Federal Reserve, “this is the worst financial crisis in 100 years”.

Many of us are aware that money deposited in UK banks is protected by the UK banking compensation scheme.

At the moment, if you have a UK bank deposit account up to £35,000 your cash is protected.

By the time this article is printed the Prime Minister may have announced an increase to £50,000. The compensation scheme covers each saver, so for a joint account up to £70,000 is covered, or £100,000 under the new proposed rules. You are protected for these sums in each bank (institution).

There are some conditions to this statement, however, it is unclear how long compensation may take if a major bank were to fail as this would mean going in to unchartered territory.

Spanish bank accounts

Savings held in Spanish banks are also protected by a compensation scheme.

However, each saver is only protected up to €16,000 in the event of liquidation.

I quite often find that people are simply too often driven by interest rates alone; it is of course very tempting to plump for 4% when the bank next door is only offering 3%!

Ask yourself - if you needed a place to store your own gold would you choose a glasshouse or an impregnable safe?

This analogy should also be applied to our hard-earned savings, because not all banks are the same - which has become only too evident in recent times.

So how can we protect our savings?

We can do several things to protect our own capital and even reduce taxes at the same time!

Let’s use a typical expatriate couple now living on the Costas as an example.

Mr and Mrs Jones have €100,000 (or currency equivalent including Sterling or US Dollars) in their local Spanish bank account.

Mr. and Mrs. Jones take a regular amount from the interest to supplement their income.

The account pays 4% per annum and after 18% tax deducted at source they receive 3.28% which is equal to a yearly payment of €3,280 (paid quarterly).

Mr. and Mrs. Jones know that their €100,000 is not growing in real terms (after inflation) and have calculated that after receiving all the interest payments as income the spending power of their capital will have reduced by one-third in ten years time assuming current levels of inflation persist.

Well, that’s in the future! Mr. and Mrs. Jones’s immediate concern is the safety of their capital which is currently held on deposit with just one bank.

Prudent choice

Mr. and Mrs. Jones are cautious savers having seen what has recently become of some of the financial institutions.

They want their capital to be as safe as possible whilst still generating a decent rate of return.

They decide liquidity funds hold the key ...

These are common-place for institutions but lesser-known to the individual saver.

One such company offering an excellent liquidity fund is Insight Investments.

Insight has the highest rating of AAAm by the credit ratings agency Standard and Poor’s, and now looks after more than £112 billion at 30 June 2008. Regardless of what happens to Insight Investments savers funds are ring-fenced which means, unlike bank deposits, no creditor can access any funds.

Importantly, this means savings are very secure.

Mr. and Mrs. Jones are comforted by the high degree of safety because they know their savings are spread across numerous bank deposits on their behalf (normally around 50).

They can see that this is a far safer option than holding excessive cash in any one bank account in the UK or Spain and, in addition, they can choose to invest in Euros, Sterling or even US Dollars.

A solution that reduces taxes as well

A Spanish approved investment bond could be the ideal solution.

These allow savers to hold liquidity funds in a tax-friendly vehicle with savings starting from as little as €30,000.

Apart from the immediate safety of liquidity funds Mr. and Mrs. Jones know they can also access a wide choice of other areas in which to invest when things make a sustained recovery.

Irish Life International is one of the institutions that provides a Spanish approved investment bond and being part of the Irish Life & Permanent Group; one of Ireland’s largest and longest established financial institutions, has a history dating back to 1939.

Irish Life International hold an ‘A’ rating from Standard & Poor's and an ‘Aa3’ rating from Moody’s and are authorised by the Financial Regulator in Ireland where Dublin has grown in to the second largest finance centre in Europe.

Bill Mott (the legendary fund manager for Credit Suisse and now Psigma) stated recently in the Sunday Telegraph:

Liquidity funds fit the bill nicely!

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