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Thursday December 7th, 2023 

News Archive - October 2008

How safe is my money?


This is the question that everyone is asking me at the moment.

This sort of banking crisis is unprecedented for most people so it's not surprising that everybody is in a state of panic.

One thing that you need to understand is that different investments are protected in different ways. I will try to explain some of the basics.

Cash savings like bank and building society deposit accounts are protected by the Financial Services Compensation Scheme (FSCS). This provides you with cover of up to £50,000 per person per institution. What this means in practice is that if you have more than £50,000 with any one UK deposit taker then you could potentially lose some of your capital if that company became insolvent.

You need to beware that you have not got accounts with companies that appear to be separate but are actually linked - for example, Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance are all part of the same group and are registered with the FSA under the name of Bank of Scotland.

Certain savings account providers offer an unlimited guarantee - Northern Rock (due to the guarantee given by the Government earlier this year) and National Savings & Investments products (like Premium Bonds) are fully guaranteed by the Treasury.

Personal pensions are our speciality, and I have spoken to a lot of clients who are asking about the financial strength of their pension provider. For the vast majority of our clients this is not really an issue. This is because of how pension funds (and indeed all similar funds such as unit trusts, OEICS and life assurance funds) are invested.

If you invest in a unit-linked pension fund via a personal pension (for example, a UK Equity fund), your contributions buy 'units' in that fund. The fund is actually a ring-fenced 'pot' of money which is in turn invested in the shares of a wide range of different UK companies chosen by the fund manager. If the UK stock market in general falls, this usually means that the value of the underlying investments falls and therefore your pension pot loses value. If one of the underlying companies was to become insolvent, then all of the fund's investment in that company would become worthless and the fund value would fall as a result. However, because the fund's investment is spread across a large number of different companies (typically 50 plus) there is little or no chance of a fund's value reducing to zero. For this to happen, all of the underlying shares would have to reduce in value to zero.

These funds are ring-fenced and would remain intact even if the parent company became insolvent. In this eventuality, the fund management business would be sold on to a new provider. This happened with Equitable Life in 2001 - their unit-linked (non-profit) policies were sold on to Halifax who became the new plan administrators.

"Equitable Life", I hear you cry - "but their policyholders lost a fortune". This is because the many of the policies involved were conventional With Profits policies.

With Profits policies are invested in a With Profits fund which is linked to the financial strength (or otherwise) of the parent company. If you have one of these policies, then your pension fund would be affected if the parent company got into difficulties.

With Profits pensions are out of favour these days due to their unclear charges, variable returns reliant on terminal bonuses and also their inflexibility. A policy which only allows investment in a With Profits fund gives no potential to switch funds into safer areas close to retirement.

If you would like your pensions reviewing, or just need reassurance about your current investments and savings, please call Mulberry Financial and we will be happy to assist you.

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The material here is for general information only and is not intended to be relied upon for individual investment decisions. Appropriate independent advice should be obtained before making any such decisions. Mulberry Financial Ltd does not accept any liability for any loss suffered by any user as a result of any such decision.
The information is based on our understanding of current HMRC rules and practices (as at the news article date) which are always subject to change. Taxation and trust advice and Cash ISAs are not regulated by the Financial Conduct Authority. This site is aimed at UK residents only.
Please remember that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. Past performance is not necessarily a guide to the future.

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