Are your savings safe? If someone had asked me a couple of years ago whether money was safe in the bank; I’d probably have laughed, says TV’s money guru Martin Lewis.

Even after Northern Rock, as customers queued outside branches to withdraw savings, my view was it was possible, but almost unthinkably unlikely, that a bank in the UK would collapse. Now after months of the credit crunch, I think it’s just unlikely.

This isn’t about scaremongering. Yet it is a call for those with money tucked away to keep one eye on the safety and protection that’s available, while continuing to focus on earning as much interest as possible.

How do you do this? Well let’s start with the basics. In the UK, the official statutory body that deals with the protection of savings is called the Financial Services Compensation Scheme.

Is every type of saving protected?

The FSCS covers money in banks, building societies and credit unions. So, if you’ve got cash in an ISA, a savings account, or just a plain old current account with your local bank, it will be protected.

However, as those unfortunate people who invested in Farepak discovered, the scheme only covers financial organisations. Supermarket savings stamps and hamper plans are not covered.

That means if the organisation behind them goes bust, you have absolutely no guarantee of getting your money back. Yes, some now offer voluntary protection schemes, but they’re nowhere near as secure as the government-backed FSCS.

What protection do you have if your bank collapses

Now let’s look at the exact score. If, unlikely as it is, a UK bank went bust. At the moment, only the first £35,000 per person, per financial institution is protected, meaning the FSCS would pay out if your bank couldn’t.

If you’ve got a joint account, you get £70,000 of cover. This isn’t a boon though, it just means you’re getting the £35,000 each, but in one account.

It doesn’t matter if you have one account or 100 accounts all with the same bank, only the first £35,000 of your savings will receive protection.

Yet note my phrasing; I didn’t say £35,000 per bank, but per institution. And this is crucial for banks that have merged, such as Halifax Bank of Scotland.

This is when things get a little confusing. The technical definition is that you get the FSCS protection for each company independently registered with the Financial Services Authority.

This means, bizarrely, you only get one lot of £35,000 for the whole of HBOS, which is a combination of the Halifax, Bank of Scotland, Birmingham Midshires and others.

However, if you have money invested in the Royal Bank of Scotland, NatWest and Tesco, which are all part of the giant RBS conglomerate, you’re separately protected in each of them.

The reason for this difference is all down to the way they’re licensed and linked. To find out whether you’re money’s really in separate institutions, there’s a full chart on my website showing the different relationships between the major banks.

Is the same protection offered for foreign banks?

The next thing to watch for is that these days many people – especially those who follow my weekly tips – regularly move their savings between the top-paying accounts.

And as many of you will know, banks from the likes of India, Iceland and the Netherlands tend to dominate the best-buy tables.

But the truth is most of these banks aren’t technically foreign, at least in the eyes of the FSCS that is.

For example, Kaupthing Edge, the current leader in the savings market offering 6.5 per cent, may have a head office in Iceland but it also has a UK license. So does popular Indian bank ICICI.

In other words, savings are protected in these institutions in exactly the same way as they are in the well-known British High Street banks.

A word of warning though. Some banks with head offices within the European Economic Area, notably Icesave and ING Direct, have opted for a slightly different system. If, in the unlikely event, one of those was to go bust, British-based savers would still receive up to £35,000 protection, but they’d first have to make a claim to the bank’s home country’s compensation scheme.

In other words, if the overseas scheme covered £20,000 the UK scheme would cover the remaining £15,000.

Unless there was some sort of major economic disaster this shouldn’t present a problem, but it could mean things are a little slower.

How to ensure you’ve got safety

Now, the big question. How do you protect your cash? The answer’s quite simple. If you have more than £35,000 in savings you should consider spreading the money around different institutions in chunks of £35,000.

That way all your money will be protected. But don’t get carried away. If, for example, you were to sell a house worth £500,000, while the textbook situation says you’d have to have it in 15 different institutions, I think that’s overkill.

Let’s face it: it would be difficult for anyone to manage 15 different accounts and worse, you’d end up sacrificing the amount of interest you earn just to protect from a very unlikely event.

You’d be far better off spreading it amongst three, four or maybe even five institutions, just to offset the chance of your bank being hit. As there are more than five institutions currently paying over 6.1 per cent, that’s not a bad deal.

That, in my opinion, would be a relatively sensible financial strategy. Yes, you’d have to accept you’re not protected 100 per cent but you’d vastly decrease the risk of losing a huge chunk of your money.

After all, as I keep saying, it’s highly unlikely that any bank in the UK would be allowed to go bust. There’s a full list of the current top-paying safe savings accounts at www.moneysavingexpert.com/safesavings

Top tip from moneysavingexpert.com

Self employed/freelance warning! A third of what you earn isn’t yours. If you’re self-employed, don’t make the mistake of thinking when you’re paid it’s your money. It’s not!

As a rough estimate around one-third belongs to the taxman. If you don’t think this way, at the end of the year you get an unaffordable tax demand that may require borrowing.

Instead, each month, simply shift a third of the cash earned into a separate “tax” account, never allow it to join your “pot of cash”. We’re now into the new tax year, so the first monies should be coming in, it’s the perfect time to start this.

TV money guru Martin Lewis, runs the consumer revenge website www.moneysavingexpert.com.

Ensure you get his weekly e-mail so you’re constantly saving money. You can watch Martin on It Pays To Watch on five at 7.30pm, Wednesdays.