So where's the safest place to put our cash?

For many of Britain's army of savers and investors, security is now the only game in town. Confidence, if not quite shattered, is desperately fragile. The question on everyone's lips is a simple one: is my money safe?

Although the authorities say yes and there are as yet no outward signs of panic, it is well worth looking at the safety-first options for your cash. Some of these are relatively straightforward and take just a little time to enact; other options, although branded "safe", may be far from it.

Spreading your savings

The run on Northern Rock over a year ago provided the first indication of the limited nature of the compensation package put in place for savers should a British bank fail. After a long delay, the Government, through the City regulator, the financial Services Authority, has finally moved to raise the amount of cash which will be protected from £35,000 to £50,000 – still less than in many other countries.

In the interim, people with large amounts in, say, one or two banks have been transferring their money around into a number of different accounts. The idea is to have deposits in each that are below the maximum amount protected by the government guarantee – although savers need to ensure that what appear to be different banks aren't in fact part of the same group.

"Clients of ours who are risk averse have been adopting this tactic," says Anna Sofat at independent financial adviser (IFA) Addidi Wealth. "Although the guarantee is not, in my view, going to be called upon, people like the idea of having it in place anyway and who can argue with wanting a little extra security considering all the turmoil."

As a nationalised bank, there has been a big inflow of funds into Northern Rock – to such an extent that it has withdrawn most of its savings accounts from sale. It did this because, in effect, it didn't want to use the extra security of being government-backed to suck in deposits from its high-street rivals.

Irish banks

The Irish government has taken the bold – and some would say cynical – step of guaranteeing all deposits in its banks, no matter the size, for the next two years at least. UK consumers have been flocking to deposit their cash.

Bank of Ireland, for one, reports a substantial rise in deposits and there are grumblings from the UK banking sector that the Irish are trying to attract as much money as possible into their banking system when international money markets are paralysed.

On top of the guarantee, some of the rates on offer aren't bad either, according to Ms Sofat: "Anglo Irish Bank [AIB] has been near the top of the 'best buy' tables for a few years and you can open an account over the phone. Its easy-access account pays 6.4 per cent, its seven-day notice 6.55 per cent and a one-year fixed rate is available for 7.05 per cent."

But how worthwhile is the Irish pledge. Neil Clarke, director of IFA Lucas Fettes, has his doubts: "This is one of those guarantees which is only ever good if it's never actually called upon. Some suggest that the total guarantee is potentially worth hundreds of billions. Ireland has a relatively small economy and population and the idea that its taxpayers could stump up that kind of money should the worse happen is, I think, very doubtful."

In the dash for a safe home for their money, savers need to remember that returns from a cash individual savings account (ISA) are tax-free – a status that may well be lost if the money is moved to a different type of account. And trying to hop back into a cash ISA at a later stage isn't easy as deposits are limited to £3,600 each tax year.

National Savings

The government backing of National Savings is its main appeal, but experts see another attraction. For Danny Cox at IFA Hargeaves Lansdown, the standout product is the index-linked certificate: "This pays a percentage above inflation, which is a very useful guarantee to have during these times."

What's more, interest paid on the three- and five-year certificates is tax- free. For a higher-rate taxpayer, with inflation currently around the 5 per cent mark, this equates to a return of some 10 per cent a year.

Investment in a single bond issue is limited to £15,000 tax-free, but once the term ends, the money can either be withdrawn or reinvested straight into another National Savings bond.

Other National Savings products, though, do not quite stack up, according to Ms Sofat: "The rates on offer are not that good compared to the best on the high street. The best of them, the cash ISA paying 5.3 per cent, is well below the best buys."

However, Ms Sofat has a soft spot for premium bonds – which instead of paying interest offer entry into a prize draw. "The odds of winning a prize have improved in the past few years and returns are tax-free. They also provide a little light relief."

Gold

It's the age-old "port in a storm" investment and once again gold looks as though it's casting its spell. London gold merchants were reporting queues of people looking to get their hands on coins last week.

The big idea is that when all else fails – including currencies – then you can always rely on gold. In effect, it's the oldest currency there is, with its own intrinsic worth as a precious metal. No wonder gold prices have spiked of late, rising 6 per cent during September as the economic news became gloomier.

But savers need to beware, reckons Mr Clarke at Lucas Fettes: "The thing about gold is that over the past generation it has proved to have been a poor- returning investment. From the early 1980s to quite recently, prices first collapsed and then were in the doldrums. Who is to say that when this crisis passes, the same won't happen again and investors who rushed in will find that they have an asset which is soon falling in price?."

What's more, gold isn't cheap to buy or sell – unlike, for example, shares. Traders can charge several percentage points in commission for executing a gold purchase or disposal.

And there are difficulties with storing gold as a physical commodity. Home insurers, for instance, may want immediate notification when it's held at a property they cover, and then ask for extra security measures to be taken as well as charging a higher premium.

An alternative to buying physical gold is to purchase units in funds that in turn invest in gold or shares in companies that trade and mine it. However, with stock markets in turmoil this may be too risky a path for many.

Government and corporate bonds

Even the word "bond" emphasises safety – as the phrase goes, "my word is my bond". And according to Peter McGahan at IFA Worldwide Financial Planning, investors are showing renewed interest in this type of product: "Put simply, the investor lends a company or government money and it promises to pay a regular income [in effect interest] and at the end of the term to repay the capital."

Bonds can vary from the copper-bottomed ultra safe to the downright sketchy. "People have to realise that not all bonds are the same," says Mr McGahan. "There are two main dangers: the government or company could default on paying an income, or, at the end of the term, the capital."

Although Western governments rarely default on bond repayments, companies have form. "When you have firms struggling, as happens in a recession, one of the first casualties is their bond payments. The key is to understand that you can still lose money through bond investment," adds Mr McGahan.

As a result, he recommends that bond-hungry investors stick to government-issued stock for the time being – because if they default, "we're all in for it anyway so it doesn't really matter."

Another way of reducing risk is to go through a unit trust fund. These funds will buy bonds across many different company sectors and the government, thereby spreading the risk. In addition, these funds can be contained within an equity ISA so growth is tax-free.

Guaranteed equity bonds

Any product with the word guarantee in its title is bound to raise the antennae of savers during such difficult times. The idea behind these plans is that part of the money goes towards purchasing a guarantee – an insurance, in essence – that once the remainder of the cash is placed in a stock market fund, the investor won't lose out. Meanwhile, if the stock market element of the investment performs well, the customer will see their money grow.

The idea is that the investor benefits from any upward move in the market over the term of the bond, but will not lose their money if the market takes a nosedive.

An even safer variant on this theme is to buy into a guaranteed equity bond with a savings account attached. This is offered by banks such as Abbey and Halifax. What happens is that investors have their money split – half going into a savings account paying interest and the other half into the stock market with that capital guaranteed. Therefore, even if the stock market element of the investment does poorly and the investor only gets back what they put in, the interest earned on the savings account provides some welcome positive returns.

However, experts warn that even the safer variant of the guaranteed equity bond may not be all it's cracked up to be. "People have to ask who is providing the guarantee that the stock market element will actually pay out if shares take a tumble," says Mr Clarke at Lucas Fettes. "It's unlikely to be the bank that is selling the product to you. Insurer AIG, for instance, which has just had to be rescued by the American authorities, was a big player in providing these guarantees."

Blue-chip shares

In previous times of trouble, investors used to home in on the shares of big companies. The well-founded theory was that they had the best chances of surviving a downturn while still paying a dividend to shareholders. However, a bedrock of the blue chips, the banking sector, has been in the forefront of this crisis. As Mr Clarke says: "The banking industry will have to reshape its business model. I can see it being five years before we see a recovery in shares. Look at big brands that have the wherewithal to buy up other firms and continue to pay a dividend. That way you earn an income from your investment."

Traditional blue-chip sectors include oil companies, tobacco groups and providers of household-name consumer products.

Debt repayment

Financial experts reckon that a good use for money lying in accounts at this time is to repay as much debt as possible. "The interest you pay on debts will no doubt be higher than what you earn through a savings account," argues Andrew Hagger from financial advice website Moneynet.co.uk. "It may sound obvious but look to pay the expensive stuff first, such as store cards and credit cards.

"You'd be surprised how many people have a tidy amount in a savings account but are paying only the minimum monthly repayment on their card debt," he adds.

Mr Hagger also recommends people look to make overpayments on their mortgages, reducing both what they owe and the term of the loan. Having said that, Mr Hagger believes people should look to have between three and six months worth of salary tucked away in case of redundancy, illness or accident.

Pension saving

Pensions have had a bad press due to mis-selling and under-performance, but Mr Cox at Hargreaves Lansdown says that during troubled times they can come into their own. "Pension funds can invest in a range of products, not just shares, and nowadays there is more flexibility for people over where their money goes. Some personal pensions allow you to invest in safer products like government bonds, and this is all done with a huge initial tax break, equivalent to 40 per cent for top-rate payers."

Mr Cox goes on to advise people nearing retirement, who are worried that the current market turmoil will damage the size of their pension pot, to pull back gradually from equities: "In the five years in the run-up to retirement, look each year to move away from shares that can be risky and into government bonds and maybe even some cash accounts. The idea is to lock in the gains you have made during the time you have saved."

Feeling exposed

James Stewart, 55, a business consultant from Moray, Scotland, has taken a safety-first approach to his finances throughout the unfolding crisis.

"It was the Northern Rock debacle that originally made me and my wife think about the degree to which my savings were protected," he said.

Mr Stewart had all his money with NatWest and felt exposed: "I was conscious that only the first £35,000 was covered and, to be frank, I am uneasy about the promises given by politicians anyway. So I moved everything above this out and opened new accounts in different institutions."

Some money went into the government-backed National Savings and a substantial proportion he moved into Abbey: "I like the fact that it was backed by the Spanish Santander bank. They seemed to be a company that was going places and was secure."

Mr Stewart adds that friends and neighbours have similar worries over their money.: "It's the question on people's minds: should they be spreading their money around more – safety in numbers."

But Mr Stewart may not have finished yet in his dive for cover in the current crisis: "Looking at what the Irish and French governments have said over protecting saver cash, I wonder if I should be moving my money to those countries just to be even more sure."

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