How secure is your cash in Irish banks

The economic crisis in Ireland is causing near-panic among the 2.3 million British savers who have billions of pounds on deposit in bonds and accounts with the country's banks. Protection schemes are in place, but concerns are growing over whether the Irish scheme would have sufficient cash to pay out in the event of a bank default.

Even if it does, some experts believe savers should not be taking risks, especially if better rates can be found elsewhere with traditional British banks and building societies.

It now looks likely Bank of Ireland and Allied Irish Bank will be part or fully nationalised. Anglo Irish was nationalised in September after its collapse. It is expected Allied will be fully nationalised with Dublin taking an 85 per cent stake in Bank of Ireland. This should mean a default is unlikely but the guarantee is only as strong as the Irish government itself.

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With fears that the crisis may spread to Portugal and even Spain, savers in other foreign-owned banks are being urged to consider moving their money to safer organisations.

What has gone wrong in Ireland?

Dublin accepted a £77 billion bailout by the EU last week. The cash was needed to shore up the nation's economy and banking system. But the rescue package has done little to assure markets across Europe. Dublin's financial state is still fragile. There are now worries of a knock-on effect with Portugal, Greece and Spain all seemingly close to requiring a bailout. Greece had an EU handout earlier this year.

So are my Irish savings safe?

Ireland's three biggest banks all operate savings accounts in Britain. But the protection offered savers, and the limits of such protection, vary between providers.

Due to its link-up with the Post Office, the bank has more than two million British customers with accounts worth more than £10 billion. Since the start of November the Post Office has offered protection under the UK Financial Services Compensation Scheme rather than the Irish Deposit Protection Scheme.

This means in the event of Bank of Ireland collapsing, UK savers would apply to the FSCS. The limit is £50,000 per person - or £100,000 for a joint account.

This will rise to the equivalent of 100,000 euros (about £84,000) per person from the start of next year. The bank also offers Post Office savers with instant and easy-access accounts a 100 per cent 'guarantee' on amounts above the £50,000 limit due to the 'unlimited' protection provided by Dublin under the Deposit Guarantee Scheme until June 30 next year.

Fixed-term bonds opened between January 11, 2010 and next June have the guarantee until their bond matures.

Depositor protection is provided in Ireland. It is estimated that about 100,000 UK savers have accounts with Anglo Irish, primarily fixedrate bonds. Protection varies so savers need to be on their guard.

Easy-access accounts and fixed-rate bonds taken out before January 28 this year are covered up to 100,000 euros under the Irish protection scheme. But accounts and bonds opened after this date have 100 per cent protection - backed by the Dublin government.

This ' unlimited' guarantee is in place for new savers until the end of next June and will remain in force on fixed-term bonds until they mature.

Patrick Connolly, an independent adviser with AWD Chase de Vere in Bath, Somerset, says: 'Savers should not panic, but stick within the limits of the protection schemes - either £50,000 or 100,000 euros.

'Savers should not rely on the ''unlimited'' protection guarantee provided by Dublin. Equally those who have all their savings in Irish banks should diversify and spread cash around with UK-based banks and building societies.'

Should I be worried about my savings with Anglo Irish?

Rebecca Taylor, independent adviser at Dunham Financial Services in Peterborough, Cambridgeshire, says she would be 'surprised' if the Irish compensation scheme was unable to meet any future payout. But she says: 'To be safe, money should be held with a UK bank or building society, but mass withdrawals could cause more problems.'

Connolly says: 'Savers with maturing Anglo Irish bonds should look to roll their cash into bonds with UK providers. There are better deals with UK-based institutions, so there is no need to take further risk.'

Anglo's one-year bond rate is currently 2.45 per cent fixed. This compares with 3.11 per cent offered by robust Coventry Building Society.

Fixed-rate bond holders with Anglo Irish who want to get out now will lose interest if they quit before their bond matures. For example, someone with a bond that has between one and two years to run would lose 90 days of interest. However, some savers will think this is a price worth paying for peace of mind.

IT operates in Britain through an authorised subsidiary so depositor protection is the same as any other UK-based bank - that is, a maximum of £50,000 through the FSCS.

What about savings in other European banks?

The troubles in Ireland have sent shock waves through other EU economies, not least Portugal, Greece and Spain.

Millions of British savers have cash in foreign-owned banks, including Spanish-run Santander, Bank of Cyprus and Dutch-owned ING Direct and Triodos Bank. Non-EU banks operating in Britain, such as Bank of India and ICICI, are required to subscribe to the UK's FSCS.

Many European-owned banks such as Santander also use the FSCS, but others, including ING Direct, Triodos and Bank of Cyprus, choose to use the depositor protection scheme in their home nation (the Netherlands for ING and Triodos and Cyprus for Bank of Cyprus).

Under EU law, protection is a maximum of 100,000 euros per person. But it means British savers would have to apply to a scheme overseas in the event of a bank default.

Regulators are looking at changing the system so that in the event of a default British savers would apply via the FSCS, which would then pursue the cash from the relevant compensation scheme on their behalf. But this is not expected to change until early 2012.

Protection - How the schemes in London and Dublin compare

The Financial Services Compensation Scheme is funded by a levy on all deposit takers registered in Britain and authorised by the Financial Services Authority.

This includes High Street and online banks and building societies. The levy, designed to cover the cost of compensation and scheme management, is based on a group's volume of deposits.

In 2008, more than £3.5 billion was paid out to 300,000 UK savers after the failure of Icelandic savings provider Icesave.

The Irish Deposit Protection Scheme is funded by a fee, which all regulated banks must pay.

The current protection level is 100,000 euros per saver. In addition, the Irish government, through its Eligible Liabilities Guarantee, provides 100 per cent cover for deposits until June 30 next year.

This guarantee could also be extended to the end of 2011, dependent on EU approval. It is not known whether the scheme, or even Dublin, would have sufficient funds to cope with compensation claims if it decided to allow a big bank to fold.