Protecting Your Savings
Q Why do I need to make sure my savings are protected?
For the simple reason that banks and building societies can, and do, go bust. It may not happen very often, but you don’t need an especially long memory to recall the collapse of Bradford and Bingley, Northern Rock and the Icelandic banks Kaupthing and Landsbanki, which had thousands of British customers, in 2007 and 2008. There is a scheme to protect your money if this happens – the Financial Services Compensation
Scheme (FSCS). However there are limits to its cover, so make sure your money is safe.
Q What protection does the scheme provide?
The FSCS covers £85,000 of savings per financial institution, plus an extra amount for savings held after ‘life events’ (see below). So if your bank or building society goes bust, and you have savings with them of £85,000 or less, you will get the money back, and usually within seven days. However, if you have more than £85,000 in one financial institution, the amount over the limit won’t be protected. There may be other ways to get it back, but that’s not guaranteed.
If you have more than £85,000 in savings, you should spread the money across different financial institutions, so that you don’t go above the limit in any one of them. In fact,it’s sensible to make sure you don’t go over
£83,000 in any one institution, as otherwise the addition of interest could take you over £85,000.
It’s important to note that the protection is per ‘financial institution’, not per bank. Many banks are part of a group, and in some cases, that group is considered a single financial institution, so the £85,000 limit would be shared by accounts with all or any of them. For example, First Direct and HSBC are part of the same group, so you only get one lot of protection to cover accounts with both of them: if you had £60,000 with HSBC and £30,000 with First Direct, only the first £85,000 would be protected.
Often the links between banks aren’t obvious, so if you need to spread your savings around, the website moneysavingexpert.com has a useful checker you can use to see who owns who. Or phone the Financial Services Compensation Scheme on 0800 678 1100.
Q What about joint accounts?
Each borrower has £85,000 of protection per financial institution, so if you have one joint account in a particular institution, it’s covered up to £170,000. But if you also have individual accounts with the same institution, you still only get a total of £85,000 worth of protection each. Unless you can prove otherwise, the FSCS assumes each partner in a joint account owns half the money, so if you had £100,000 in a joint account with your partner, and £40,000 in an account in your own name, £5,000 of your money would be outside the protection of the scheme. Again, you can avoid this problem by spreading your money across different financial institutions.
Q What’s the exception for ‘life events’?
If you’ve deposited up to £1m after a ‘life event’ such as selling your house, or receiving an inheritance, redundancy payment or compensation payout, the whole amount is protected by the scheme, even if it’s all in one institution, for six months. That means you can choose the account that gives you the best rate of interest and not have to worry about spreading the money around. For specific details of what counts as a ‘life event’, see fscs.org.uk, or call them on 0800 678 1100.
Q Are there any savings accounts that aren’t covered?
Yes. The FSCS only covers organisations regulated by the Financial Services Authority, which essentially means all UKregistered banks and building societies. Foreign-owned banks are covered if they’re registered here. Most are, but you can check at bankofengland.co.uk. Some EU banks use a similar scheme that’s operated by the government in their home country – the coverage is similar but you are relying on that government paying out, and getting your compensation could potentially be trickier and more time-consuming.
If you’re in a ‘Christmas club’-type savings scheme, your money is not covered by the compensation scheme, as many savers discovered when Farepak went bust in 2006, and thousands of people lost their money. If you want to put away money regularly for Christmas, it’s a much better idea to use a regular savings account with your bank or building society, which will also give you interest.