Christmas savings and hamper clubs: is your money protected if the company goes bust?

What this is

Christmas savings clubs and hamper schemes let you pay a set amount every week or month through the year, then get a hamper, food or shopping vouchers in time for Christmas. For many families they're a useful way to spread the cost. A survey of 2,000 adults for the savings club Park, published in October, found only 22% of people set money aside during the year for Christmas.

The catch is protection. A savings club is not a bank, building society or credit union, so the money you pay in isn't a deposit covered by the Financial Services Compensation Scheme (FSCS). If the club fails, you're relying on whatever arrangements it has made to keep your money separate.

At a glance

• The FSCS protects deposits of up to £120,000 per person, per bank, building society or credit union. Payments into a hamper or voucher club aren't deposits.
• Some clubs hold customers' money in a trust, which is designed to keep it apart from the company's own money if it goes bust. Ask how yours does it.
• Farepak's collapse in 2006 left about 120,000 customers out of pocket. After six years they'd received about 50p in the pound.
• Vouchers carry their own risk. If a shop that accepts them goes bust, it may stop taking them.

What went wrong at Farepak

Farepak, a hamper and voucher company based in Swindon, went into administration in October 2006, weeks before Christmas. A High Court statement in 2012 said it owed customers and agents about £37 million. Customers counted as unsecured creditors, so they were near the back of the queue. In July 2012 the liquidator said savers would get back about half their money in total, including 17.5p in the pound paid in 2006 by the Farepak Response Fund charity.

After Farepak, the industry set up the Christmas Prepayment Association. Park says it helped found the association in 2007 and that "The money you pay to us is held in trust." We couldn't independently check the terms of any club's trust, so ask your club for them in writing.

A worked example

This is an illustration. Kerry pays £25 a month into a hamper club from January to October, £250 in all. If the club collapses in November and her money wasn't protected, she could get back far less than she paid, and not until long after Christmas.

If Kerry had put the same £25 a month into an easy-access savings account or a credit union savings account instead, all £250 would be FSCS-protected. At an interest rate of around 3%, she'd also earn a few pounds of interest. More importantly, she could spend the £250 wherever the best deals are in December, including the Black Friday sales on 27 November.

What to do now

1. Ask your club how your money is protected. Is it held in a trust? Who are the trustees? Is the club a member of the Christmas Prepayment Association?
2. Check the company on Companies House. Late or missing accounts are a warning sign.
3. Don't leave money in longer than you need to. If vouchers are available early, take them and spend them soon after.
4. Check where vouchers can be used and when they expire, before you commit for another year.
5. For next year, consider a bank or credit union account with FSCS protection. Many credit unions run Christmas savings accounts.

Questions

Is my hamper club covered by the FSCS?

No. The FSCS covers deposits with authorised banks, building societies and credit unions. A hamper or voucher club is a company you've prepaid for goods.

What happens to my vouchers if a shop goes bust?

Administrators decide whether to keep accepting gift cards and vouchers, and they sometimes stop. Spend vouchers sooner rather than later.

Can I get a refund if I change my mind?

It depends on the club's terms. Read the cancellation section and ask the club directly before you stop paying.

Ways to save

You can still get a hamper without prepaying all year: buy one outright closer to Christmas. Have a look at Peach Hampers, Marks & Spencer and Hotel Chocolat, or put together your own from Aldi or Iceland.

Sources: FSCS: check your money is protected, Judiciary of England and Wales: Farepak statement, June 2012, MoneySavingExpert: Farepak customers to get half of money back, Park: trust and safety, Park survey of 2,000 adults, Companies House