Insurance for deposited funds

Oran A. Hall, Contributor

QUESTION: I have an elderly relative who is selling a home in the UK and moving back to Jamaica and plans to deposit the proceeds of the sale of a property into a Jamaica bank account, approximately J$20 million. How much of this total sum would be insured against losses in the event of, for example, the bank collapsing?

PFA: The way deposit insurance is in Jamaica, how much is recoverable depends on how the funds are distributed among the various types of accounts in a deposit-taking institution.

The maximum payable per depositor per ownership category in each deposit-taking institution is J$600,000.

Account categories covered include individual, joint, business, and trust. The Jamaica Deposit Insurance Scheme covers savings; fixed, term, and time deposits; and chequing accounts.

If your relative were to place funds in individual accounts of the types of accounts just mentioned in the same financial institution, their balances would be aggregated and he or she would be compensated to a maximum of J$600,000.

If, on the other hand, he or she had one of each type of account in a financial institution, the sum payable on each account would be J$600,000, so it is conceivable that as much as J$2.4 million could be recovered for funds in that particular institution. The same amount could also be recovered for funds placed the same way in other financial institutions covered by deposit insurance.

To be fully covered, your relative would need to have approximately 34 accounts. That makes for a pretty untidy situation, and particularly for an elderly person. Imagine the amount of time and effort it would require to manage those accounts.

Depositors would not necessarily lose the uninsured portion of their deposit but may receive all or some part of it when the assets of the failed deposit-taking institutions are sold by the liquidator.

Deposit-taking institutions are not the only places to put money. It can be securely put into government securities. Repurchase agreements backed by Government of Jamaica instruments offer one clear option. Treasury bills, which can be sourced directly from the Bank of Jamaica at any of its auctions, or through an investment dealer, are another option. These instruments offer superior yields to savings accounts, and to time/fixed/term deposits to a lesser degree. They can be bought to mature in such a way that your relative's cash-flow needs are adequately met.

Beyond that, to the extent that they are used as instruments in long-term savings accounts, they offer a tax advantage: no tax is payable on interest earned if the maximum sum placed in these accounts each year is J$1 million, each sum is placed for five years, there is no withdrawal of principal before the expiration of the five-year term, and no more than 75 per cent of interest earned in any period is withdrawn.

These options may appear quite complicated, but if needed, help is generally available from the advisers in the financial institutions.

If your relative is really very concerned about security of principal and is not satisfied with the facilities available here, there is the option to let the funds remain in the United Kingdom and withdraw as and when needed. This could be inconvenient and comes with currency risk. The same may also be said if the funds are brought to Jamaica and deposited into a foreign currency-denominated account.

The rates in the UK are lower than they are here, but being able to secure significant sums by some form of deposit insurance is less cumbersome than it is here. All UK-regulated current or savings accounts and cash individual savings accounts in banks, building societies, and credit unions are covered by the government-backed Financial Services Compensation Scheme (FSCS).

If the bank fails, depositors get back up to £85,000 per person per financial institution; the majority should get it within seven days. Because cash in joint accounts counts as half each, and each depositor gets protection of £85,000, the full protection of the account would be £170,000.

If an individual has a joint account and an individual account in the same bank, protection is capped at £85,000. Your relative's J$20 million is roughly equivalent to £144,000, so he or she could place approximately £72,000 in each of two accounts which are not in "sister" organisations to get the maximum protection.

Elderly persons should, more than any other group, be concerned with preserving their principal. I commend you for the part you are playing in helping your relative make the right decisions.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com