The collapse of Northern Rock, Bradford & Bingley, and Icelandic banks caused a lot of panic several years back, leading people to wonder whether their savings are safe at all. What steps can we take to secure our savings from such a terrifying and real threat?
We will provide a detailed safety checklist as well as what safeguards you can apply in case of averse economic scenarios.
The essential facts you need to know
At least 6 facts will let you prepare for worst-case scenarios, namely:
- Increased protection limit. At present, your savings now gets £85,000 protection based on UK-regulated financial institution instead of the former £75,000 only
Every UK-regulated savings and current account as well as cash ISAs in banks, credit unions and building societies are protected by the Financial Services Compensation Scheme (FSCS).
From £75,000, the cover was raised to £85,000 on 30 January 2017 after the pound's post-Brexit fall led to a review by the Bank of England. However, the amount of £85,000 is not given for each account but for each financial institution. Hence, if the bank runs, you receive £85,000 for each person, for each financial institution. Most savers will get the amount within seven days.
- You get a temporary £1-million-protection after 'life events'
Based on rules established in July 2015, savings of up to £1m may be protected for a six-month period in case your bank fails
The increase will cover such life events as selling your home (but not when you buy-to-let or a second home), redundancy, inheritances, and insurance or compensation payouts that could result to you holding a temporarily-high savings amount.
The additional protection will apply starting from the day on which the money is transferred into the account, or the day on which the depositor becomes eligible to have the amount, whichever comes later. You have to provide documents to show where the funds came from in case you file a claim for the amount. It might take at most 3 months for any release of cash above £85,000.
This development is beneficial as it provides the saver time to prepare on how to utilize the money. Moreover, you can maximise savings by adding more money into higher interest-paying accounts instead of the usual lower-paying accounts.
- Not every UK savings account is UK-regulated
Majority of banks, also foreign-owned ones such as Spain's Santander, are regulated by the UK government. But certain EU-owned banks prefer to use the 'passport scheme' where protection only comes from their HOME government. Examples are Fidor, RCI Bank and others.
Joint accounts count as doubly protected
Since cash in joint accounts are considered as half each, it gets a £170,000 protection.
If you also have a personal account with the same bank, half of your joint savings stands as your total exposure; hence, and any additional amount above £85,000 is not protected.
An institution is a distinct entity from a bank
Remember, the protection is for every institution, not for every individual account. Therefore, having 4 accounts with a single bank only entitles you to only £85,000. The meaning of the word 'institution' depends on a particular bank's license and huge banking conglomerates complicate the meaning.
For instance, Halifax and Bank of Scotland are sister-banks and their accounts are covered for only £85,000, for one institution. RBS and NatWest, also sister-banks, however, have separate limits.
Distribute your savings to protect them
To achieve fail-proof safety, save at the most £83,000 in every institution (which gives you a safety allowance of £2,000 for interest growth). Doing so will spread your money in perfect safety even if you stay below the £85,000 mark; hence, in case your bank fails, your money will not be inaccessible for a certain period. Having two accounts will reduce such a risk.
What the FSCS protects
The Financial Services Compensation Scheme (FSCS) only covers organisations under the auspices of the Financial Conduct Authority (FCA). This led to the tragic failure of the Christmas savings scheme Farepak, which had no protection at all. Thus, when the scheme went caput, all the money disappeared.
The primary types of protected savings include the following:
- Bank and building society accounts
FSCS covers all UK bank, credit unions, or building society current and savings accounts; and it also partially covers small business accounts.
Some forms of protected equity bonds, which are 'deposit accounts' whose interest growth relies on the stock market's performance, may likewise qualify for 'savings' protection.
- Any savings within a SIPP pension
For those who have a self-invested personal pension scheme and saved cash money there (in contrast to investment funds), FSCS provides complete protection for their money, separate from any other investment protection.
SIPP service-providers will help you determine the banks holding your money; hence, you can find out if it is linked to others you where you also have savings.
Any cash ISA (includes Help to Buy ISAs)
These refer to simple tax-free savings accounts, provided with FSCS protection like other savings accounts. Among those under this coverage is the cash ISA's forerunner, the Tessa-Only ISA (Toisa). Moreover, the ISA money does not lose its tax-free status in case the institution holding it fails.
Ask yourself these questions: Do I have protection for my investment in a company? Does my insurance have protection in case the company fails?
How protection works
FSCS covers all UK-regulated deposits – including money saved and accrued interests – that you have put into a bank or a building society savings instrument.
An independent government-sponsored fund regulated by the FCA, FSCS protects some of your money in the event of a bank collapse, although you will lose temporarily any access to your money during the period of compensation.
As long as the bank is UK-regulated, the following rule applies to all, whether children or adults, or wherever they may reside, as stipulated thus:
100% of the first £85,000 in your savings, for each financial institution, is covered.
You may ask: What is considered an institution and what is a UK-regulated institution? And other issues to consider, such as the following:
- A joint account has a limit that is doubled
- Rates were different prior to February 2017
- Savings are not considered along with debts
- Interests are part of the threshold
- Compensation will take time for release
- Offshore accounts are not often protected