Putting money into a savings account? Can you trust the account provider to look after it, and be able to pay it back when you need it?
The simple answer, as long as your account is with a UK bank or building society is ‘yes’.
Banks and building societies can, and very occasionally do fail, but they are covered by a depositor protection scheme that would cover your money if the institution in question went bust.
This is the Financial Services Compensation Scheme, or FSCS.
Established in 2001, the Financial Services Compensation Scheme can protect and reimburse consumers if their financial provider goes out of business. As long as the firm you’re dealing with is regulated and authorised by the Financial Conduct Authority, the FSCS can come to the rescue.
If your savings provider fails and can’t pay you your money back, the FSCS will compensate your losses, covering both the capital invested in your savings account and any interest it has earned.
But there are some limits and rules to be aware of.
What exactly does the Financial Services Compensation Scheme do?
The FSCS covers money held in banks, building societies and credit unions. There are also provisions for losses by insurers, mortgage lenders, pension providers, debt management firms and even financial advisers.
You may also be eligible for compensation if your pension or insurance provider goes bust, or if you lost money as a result of poor financial advice.
If you have money in a bank or building society that fails, you’ll automatically receive compensation within seven days. If your pension provider collapses, or you lose money as a result of poor advice – you’ll have to lodge a claim with the FSCS.
But there is a limit on what the FSCS can cover, basically up to £120,000 held with any eligible financial institution. And here is where care is required when you plan where your money will be stashed.
£120,000 is the total you have with the bank or building society, not in each account. You could have £80,000 in a savings account, £60,000 in an ISA and a £2,000 balance in your current account from the same bank, and you’d only get a maximum of £120,000. Anything above £120,000 won’t be covered. It might make sense to spread your savings across several banks.
But remember, several banks operate under the same licences. For example, Halifax and Bank of Scotland share a banking licence, so you’ll only be covered for £120,000 for accounts across the two brands.
While the standard FSCS limit is £120,000, there’s a temporary high balance exemption that increases the limit to £1 million for six months. This is to cover funds where the account balance is unusually high such as a house sale, giving enough time to redistribute the money across different banks to protect the full amount.
What isn’t covered by the FSCS?
Most UK financial institutions and products will be covered, but there are some exceptions. These include unregulated investments such as cryptocurrencies, innovative finance ISAs and certain e-money companies.
Any funds that are related to a conviction for money laundering, or where the account holder’s identity has not been verified by the bank or building society are excluded.
National Savings and Investments (NS&I) isn’t covered by FSCS, but it is 100% backed by HM Treasury.
Savings platforms – websites that help you find the best rates for your savings – are not covered by FSCS, but the accounts they serve may be.
Making sure you are secure
To make sure you have the protection of the FSCS, and have more than £120,000 in your savings, you need a savings strategy. Spreading your savings across various providers will help, but you need to be sure that the provider you choose don’t operate under the same banking licence.
So here’s a way to get the security you need for your savings and maximise the interest they earn. Call us at Continuum and let us help you select a spread of savings account providers for suitable saving options with competitive rates of return.
FSCS bank protection limit – Are my savings safe? – MSE
FSCS welcomes higher deposit protection limit of £120,000 | FSCS
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, or any recommendation. You should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate deposit accounts.
Equity investments do not afford the same capital security as deposit accounts.
