Keep tabs on your savings and investment protection

People with money deposited in a bank or building society that is not authorised by the Prudential Regulation Authority, or with more than £85,000 in a savings or deposit account, are informed how much of their money is at risk.

Investors Chronicle recommends that savers and investors should periodically keep tabs on the safety of their money.

For example, Northern Rock is no longer 100 per cent safe. From 2007, when it was taken over by the government, until May 2010, all savings in Northern Rock were 100 per cent safe, as like NS&I it was a state-owned bank.

Between May 2010 and 31 December 2011, it had the same protection as any other UK bank (£85,000) with the exception of any fixed-rate savings set up before 24 February 2010, which retain their fully government-backed status until they mature.

On 1 January 2012, Virgin Money completed the purchase of the savings arm of Northern Rock. Virgin has now rebranded all Northern Rock accounts, so they now fall under the same lot of £85,000 FSCS protection.

For those with bigger savings, in the unlikely event of a bank or building society going bust, the golden rule is not to have more than £85,000 in any one financial institution. Spread your savings around a number of accounts.

But do check that they are genuinely separate institutions. Your savings may not be fully protected if you have more than £85,000 (or £170,000 in joint accounts) split across banks, building societies and credit unions which share a banking authorisation. For example, a saver holding £50,000 with Halifax and £50,000 with Bank of Scotland would find that they bust the limit as both banking and savings brands are part of Lloyds Banking Group.

We think investors should also be aware of investment protection limits. The maximum amount covered by the FSCS is £50,000 for investments such as stocks and shares, unit trusts and pensions, paid only when an authorised firm is in default.

However, the vast majority of Isa providers, stockbrokers and platforms hold their customers' assets ringfenced in a nominee account, which works a bit like a trust. The custodian of this account - a third party, separate to the provider - is the legal owner, but you are the beneficiary.

In the event of an insolvency, your assets would not be available to the firm's creditors, nor to those of the nominee company if it were to fail, and that should ensure that you receive the full value of your investments. However, it could take a long time to extract assets from a failed nominee company, during which time you would be unable to trade them - and may lose out if they fall in value.

For this reason, we think that if you hold more than £50,000 it might be a good idea to split your investments between providers.

It is also a good idea to try to assess the financial strength of a provider, although it is still very difficult for investors who hold money with stockbrokers and platforms to do this. Some platforms make specific moves to reassure customers of their financial strength. For example, Hargreaves Lansdown emphasises its conservative approach to accounting in a section on its website devoted to the safety of customers' money.

However, in terms of independent platform rating services, we only know of AKG, which rates platforms that are used by intermediaries on an A-D basis (A being the strongest). It has rated the Alliance Trust Savings platform as B (strong) in terms of financial strength. However, this is the only platform on its list that is widely used by self-directed investors as well as intermediaries.

Guy Vanner, managing director of AKG, says: "Financial strength isn't all about going bust. It's also the stage before which affects the administration side. Can they handle your calls and has the information technology begun to creak?"

CREDIT RATINGS OF A SELECTION OF UK BANKS

Source: IC research using the banks' websites.

Platform Financial Strength Ratings

Source: AKG Actuaries & Consultants