Q&A: saving with Northern Rock
Updated on 18 September 2007
Should Northern Rock depositors stay where they are? Or are there better - and safer - deals available?
Should Northern Rock savers stay where they are?
Yesterday the chancellor, Alistair Darling, promised that the government would guarantee all Northern Rock savings - some £28bn worth of deposits.
This overrides the existing guarantee from the Financial Services Compensation Scheme, which depositors with all banks enjoy, limiting compensation to 100 per cent of the first £2,000 deposited and 90 per cent of the next £33,000.
The bank is continuing to pay interest on deposit accounts. What is more, savers stand to lose out on long-term fixed interest deals if they withdraw money at short notice.
Where else should I deposit my Northern Rock cash?
NS&I (National Savings & Investments), which is backed by the treasury, guarantees that savings are 100 per cent secure.
Among the best deals on offer for savers, Birmingham Midshires is offering 6.91 on its one-year bond, while the Anglo-Irish Bank pays 6.9 per cent on a similar product.
Manchester Building society's Premier Postal account offers 6.26 per cent on deposits of £1,000 or more, and Sainsbury's Bank's internet Saver account is paying 6.25 per cent.
What if I have more than £35,000 at another bank?
The treasury said yesterday that the guarantee offered to Northern Rock savers would also apply to customers of any other lender experiencing difficulties.
Why did the government step in to reassure savers?
The fact is that the Financial Services Compensation Scheme only guarantees a maximum of £31,700 for a deposit of £35,000. What is more, any claim for losses takes a minimum of six months to process.
So, arguably, many of those queuing outside Northern Rock branches are behaving in a perfectly rational manner in wanting to withdraw their savings.
In the United States, by contrast, 100 per cent of deposits are guaranteed for savings up to $100,000, and depositors are placed at the top of the list of creditors.
Who has lost out in the present turmoil?
Northern Rock shareholders have seen the bank's share price plummet in recent days - although its shares had already been in steady decline since the start of the year. Shareholders with Alliance & Leicester, Bradford & Bingley and Paragon have also taken a hit.
Northern Rock was demutualised and floated on the London Stock Exchange 10 years ago. In the process, members who held savings accounts and mortgages received shares in the new bank. Anyone who has held on to shares thus acquired will have suffered a loss.
And Northern Rock savers whose deposits had been tied into long-term savings products will also have lost out - the bank will, in effect, have made money from some of the recent cash withdrawals.
