Cold comfort for savers as guarantee runs out

However, scenes of worried hordes queuing outside Northern Rock branches, the near collapse of Royal Bank of Scotland and HBOS, and the implosion of the Icelandic banks – after they had mopped up UK deposits by offering huge returns – changed all that.

For the first time, savers realised they needed to take the safety of their savings seriously, because there were no guarantees that government would always step in with a rescue.

But safeguarding your money is not easy, as the rules, while looking simple, are fiendishly complex.

Essentially, the first 50,000 or ?50,000, (whichever is the higher), that you have invested with a bank or building society which goes bust is protected by the Financial Services Compensation Scheme (FSCS), which refunds the money.

This is why savers are strongly advised to hold only a maximum 50,000 with one institution, or 100,000 for two people in a joint account. The 50,000 maximum compensation applies per individual.

However, this only holds for institutions registered and licensed in the UK, or those which have been "passported" in by a Europe-wide treaty.

This, however, is where the complications begin, because the 50,000 does not apply to each savings account. It is the maximum per banking licence.

The problem for consumers is that a range of savings banks or financial services operations, which look like separate companies, can be covered by the same licence, and it is almost impossible for the ordinary punter to know which are connected and which are not.

When HBOS got into difficulties, for example, had it gone down, the collapse would have triggered a system-wide tsunami. Halifax relied on the Bank of Scotland banking licence, but so did the AA, Aviva (formerly Norwich Union), Intelligent Finance, Birmingham Midshires and Saga.

If anyone had kept their investment in each of these to the maximum 50,000, they could, in theory, have lost around 300,000.

The question of where to invest money safely is particularly pertinent for Northern Rock investors.

In an attempt to stem a mass panic, the government guaranteed all investments in Northern Rock, including sums above 50,000. This, ironically, triggered a flight to safety, with money flowing into the bankrupt bank during the height of the credit crisis.

However, that extraordinary guarantee is shortly to end. From 24 May, only the first 50,000 of savings is protected, as with other UK institutions. Money in fixed deposits, such as one, two or three-year bonds will continue to be protected until the term comes to an end. Otherwise savers should think about moving the surplus above 50,000 elsewhere.

We have produced a table to show institutions with the same banking licence. Beyond this, building societies, owned by their members, have their own individual licences.

Most international arms of big banks will have a separate offshore banking licence, but the investor protection regimes in places such as the Isle of Man, Jersey and Guernsey are lesser than with banks registered in mainland UK.

The other area of concern are institutions not registered in the UK but which claim equivalent arrangements, through "passporting", covering nations signed up to the European Economic Area agreement.

Icelandic banks, including Icesave and Kaupthing, had signed up to arrangements, which meant that if any of its savings institutions collapsed the Icelandic compensation scheme paid the first ?20,000 and, in the UK's case, the FSCS bridged the gap up to 50,000.

However, when the banks hit the rocks, it became clear that a country with a population half the size of Glasgow was not in a position to bail out UK savers, attracted in flocks by rates they could not earn with British institutions. UK deposits had grown to 6billion, and the debt to the UK saver amounted to 8,000 per Iceland resident, or 18 per cent of the national income.

To avert a panic, the British Government stepped in and guaranteed everyone's money, with the intention of getting back some of the cash later. This has not proved easy. Rather a 2.3bn row between the two countries followed, culminating in a referendum about whether Icelandic citizens should pay the price of UK investor greed and gullibility.

Although the result was not known when we went to press, the polls indicated Icelanders would reject any suggestion they should pay reparations to the UK.