How the FSCS protects your savings and investments

Bank runs, government bailouts and falling bank share prices have the power to seriously worry savers and investors, and we have seen them all in recent years.

The financial crisis of 2007 onwards awakened savers to the importance of knowing what protects their savings, investments and pensions.

The answer in Britain lies in the Financial Services Compensation Scheme, which protects savings accounts worth up to £85,000 per individual authorised bank per saver.

It also covers investments and pensions, although not exactly in the same way.

We explain what you need to know about FSCS compensation.

Banking problems

Banking problems were a hallmark of the financial crisis: some of Britain’s biggest names were in trouble and Halifax Bank of Scotland, NatWest and Northern Rock all needed rescue missions.

Since then there have been ups and downs, and in the spring of last year there was another wave of ups and downs. The US Silicon Valley Bank collapsed and HSBC had to bail out its British subsidiary. Then the banking giant Credit Suisse announced that it had secured a £45bn lifeline from the Swiss central bank and merged with UBS.

The headlines may have reminded savers of the financial crisis, but the circumstances were different. In this case, banks were hit by rapid interest rate increases that reduced the value of the “safe” government bond assets they held. Regulators quickly intervened and the crisis was contained.

The good news for savers and the economy is that banks are in a much better position than they were in 2008. They have to comply with much stricter regulations from the Bank of England and are subject to regular stress tests.

And even if something were to go wrong, UK savers and investors benefit from a range of protections in an improved system.

Banking security: Your cash savings

In the very unlikely event that your bank, building society or credit union goes bust, you should be able to get your savings back, provided you meet certain conditions.

Firstly, the provider holding your cash must be authorised by the Financial Conduct Authority (FCA) and covered by the Financial Services Compensation Scheme (FSCS). They should clearly advertise whether they have this coverage. You can also check on the FSCS website.

Secondly, you will only get back savings worth up to £85,000 per bank. If you have a joint account, you will be covered up to £170,000.

This means you should not have more than £85,000 individually in each bank or building society.

The protection applies to all accounts held within the banking group, not to each account, so you should be wary of banks that have multiple brands. For example, First Direct is owned by HSBC and Royal Bank of Scotland is another brand of NatWest bank.

You can get protection of up to £1 million for up to six months if you have a temporarily high balance, for example after selling a house.

How the FSCS protects investments

Investment providers should not go bankrupt. They are highly regulated and therefore your provider should keep your money safely in a segregated client account.

But things can go wrong, so it’s good to know how you’re protected.

If something goes wrong, you will receive FSCS protection worth up to £85,000. Plus, if an authorised firm gives you bad advice or is negligent in managing your investments, you will be covered.

However, you will not receive any compensation if the value of your investments decreases as a result of movements in the financial markets. That is just part of the risk of investing.

Before you invest, check that the company is authorised by the Financial Conduct Authority or the Prudential Regulation Authority. Make sure that it is regulated for the specific activity it offers you, for example, offering investment advice.

Some types of investments do not offer protection, such as cryptocurrencies, mini-bonds and peer-to-peer loans.

What does your pension protect?

If your pension provider goes bust, the compensation you are entitled to will be determined by the type of pension you have and whether it is regulated by the FCA.

Defined contribution pensions: These are pension plans in which both you and your employer pay a fixed monthly amount.

Although these plans are arranged by your employer, your money is held by an independent pension provider. This means that if your employer goes bust, your pension funds will not be affected. Whether your savings are protected by the FSCS in the event of bankruptcy depends on how your plan is set up. You can check this with your pension provider.

Self-invested personal pensions: In most cases, if your Self Invested Personal Pension (Sipp) provider goes bust, you would receive compensation from the FSCS of up to £85,000.

However, some providers structure their SIPP plans so that all your savings are covered. Ask your provider what protection they offer.

Defined benefit pensions: Also known as a final salary pension, this type of workplace pension offers a guaranteed income during retirement. It is up to your employer to ensure that there is enough money available to make the payment.

Pension funds are usually separate from the company’s balance sheet, so even if your employer runs into financial difficulties, your pension should be protected.

If the scheme is unable to pay out, your pension is taken over by the Pension Protection Fund (PPF), which is a lifeline fund set up by the Government.

Becky O’Connor, public affairs director at pension provider PensionBee, says: ‘The PPF will match 100 per cent of your pension if you have already reached the scheme’s retirement age by the time your employer goes bust.

‘If you have not yet reached the system’s retirement age, you will only be entitled to 90 percent compensation, up to a set limit.’