Should I put my money in the bank?

Nowadays, most of us have bank accounts, and if not a bank account, then a building society account. Between them, the banks and the building societies hold the vast majority of savings in the UK.

The basic principle of a bank is that it will make a profit for itself by borrowing money from one person and lending it to another. The major clearing banks have developed into vast organisations with many thousands of branches, each offering a wide range of services.

But their bread and butter is the taking of deposits, whether from the individual or from large corporations, and the lending of that money to someone else at a profit.

For the individual the advantage of having a bank account is that he or she will be able to use the wide range of bank services on offer (and particularly the transmission of money by using cheque websites and credit cards).

There are two major types of accounts offered by the clearing banks. The first is the current account, which pays no interest, but which allows the individual to write cheques against his balance. The second is the seven-day deposit account which pays an interest rate broadly in line with market rates, but for which the individual has to give seven days' notice of withdrawal.

There are other options open to you, particularly among the more enterprising building societies, but everybody who wants to have an intelligent arrangement of his or her financial affairs should have a bank account.

The payment of salary cheques by monthly direct credit is one obvious advantage of having a current account. But whether it is worth putting a substantial portion of your money into the seven-day deposit account depends very much on how competitive the bank's interest rate is.

It goes without saying that it is not a good idea to hold any significant sum in a current account because it generally pays no interest. Individuals should be prepared to move their money between accounts, to get the best rate possible.

Of course, you have to bear in mind your relationship with your bank manager in case you want to borrow money or use other bank services at some time.

In this case you may decide to have available both a clearing bank current account and a seven-day deposit account, even though you may have other savings options.

Generally speaking, the rates banks pay on seven-day deposit money are competitive with other options. Interest is paid after deduction of tax.

Apart from the simple current and deposit accounts, all the clearing banks have a wide range of savings schemes offering different benefits. It is impossible to list here all the schemes offered by the clearing banks let alone those of the trustee savings banks, the merchant banks and other banking institutions.

But the clearers all provide the options of saving money for longer periods, thus earning higher interest rates, and of saving in regular instalments. The clearing banks are highly competitive with each other, but tend to offer the same range of services. You have to decide in what form you want to save your money, and whether or not to choose some of the more complicated schemes.

How safe is the money I leave in the bank?

Nothing in life is absolutely certain, but investing money in a major clearing bank must be as safe a risk as anything could be. Since 1999 the Bank of England has supervised the British banking system, under the Banking Act.

This divides institutions into two categories - recognised banks and licensed deposit takers. To get on to either list various criteria have to be met, and above all the Bank of England has to be satisfied that the institution is sound. It goes without saying that the clearing banks are very much at the top of the top category.

In addition, the Banking Act introduced a deposit protection scheme which effectively protects 75% of the first £110,000 of any bank deposit. The scheme is financed by a contribution (0.01% of the sterling deposit base) from each banking institution on the list. It is hoped that this will be enough to deal with any crisis that the authorities can foresee.

CCMG - 2013

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