As the compensation limit for bank and building society accounts is cut to £75,000, you could qualify for £1 million of protection on your deposit
Unexpected Changes To The Financial Services Compensation Scheme Could Mean Your Deposit Is Less Secure, But There Is Also Good News
How To Keep Your Deposit Safe
The reduction in the value of the Euro may have caused an unintended consequence to the security of your bank and building society deposit. The Financial Services Compensation Scheme limit, which is set by an EU directive, has been reduced from £85,000 to £75,000.
The Scheme pays out to those who deposit money in the event the organisation holding the deposit goes bust.
The Scheme is funded by levies imposed on all regulated financial services companies, from individual advisers to the UK’s largest banks and asset managers. The charges they pay are based on predicted payouts. The Financial Services Compensation Scheme analyses the total claims in pensions, savings, insurance and investments in the previous three years and then estimates what claims might arise in the coming year.
Your Deposit Protection Is Being Cut
From 1 January 2016, the limit for a deposit in current accounts and savings accounts held with banks and building societies will be reduced to £75,000. At present, it’s £85,000.
Couples using joint deposit accounts will see their total protection fall from £170,000 to £150,000.
If you hold a lot of cash on deposit, you could have less protection if you keep it all in one place.
Your SIPP Deposit Is Included In The Calculation
Your protection is ‘per organisation’. By way of example, let’s assume you have on deposit £75,000 of your cash with Santander. It doesn’t matter whether it’s held in one account, or spread over many accounts. If your SIPP Bank Account is also held with Santander, or one of its subsidiaries, from next year, in this example, any money held on deposit in your SIPP won't be protected.
You Could Qualify For £1 Million Of Deposit Protection
Alongside the 12 per cent reduction in deposit protection, there are some scenarios where your compensation limit will be increased to whopping £1 million. These are temporary one-off situations.
You’ll be covered if money is deposited temporarily in your bank account for such things like a house sale, an inheritance or in respect of a divorce settlement. Your deposit will receive protection up to £1 million for six months from the date the money is accessible in your account. After this period expires, your protection will fall back to the standard £75,000.
You can find more information about deposit protection and you can watch the short video below.
How To Protect More Than £75,000 Of Your Deposit
As the Financial Services Compensation Scheme only covers the amount per organisation, it follows that once you reach the £75,000 limit with one firm, you could consider moving the excess to a deposit taker with a separate banking licence. And that’s the point.
You need to check with the organisations you’re considering whether they operate under a separate licence. For example, Halifax and Bank of Scotland operate under the same licence, but Halifax and Santander operate under different licences, giving you double the deposit protection.
Other Investments Are Covered By The Scheme
It’s not just deposit accounts that enjoy protection. Money invested in funds is also protected, but up to a limit of £50,000 per fund manager. The same rules apply as far as increasing your level of protection is concerned, by spreading your money across different fund managers. As a point of reference, the Scheme will not pay out if the value of your fund falls. Only if you can prove you were mis-sold an investment.
Money held in a personal pension or a stakeholder pension with an insurance company is protected 100 per cent by the Scheme should the insurer go bust. The same applies to other lifetime savings such as endowment policies and investment bonds.
SIPP protection is treated differently and is more complicated. If the SIPP operator fails, the compensation limit is £50,000. However, compensation limits vary with the different investments you select. Your cash deposit will be limited to £75,000. Your investment compensation limit is £50,000.
The good news is that protection given to annuities has been increased from 90 per cent to 100 per cent. So if your annuity provider goes bust, your annuity income will be paid in full each year. This brings annuities in line with other mandatory insurance products, like car insurance that enjoys 100 per cent protection.
However, if you put your pension into drawdown, the drawdown wrapper from your pension provider will only protect you to £50,000 if the provider goes bust.
What Isn’t Covered By The Financial Services Compensation Scheme
National Savings & Investments don't fall under the Financial Services Compensation Scheme. The good news, though, is that the government protects 100 per cent of your deposit in these cases.
Generally speaking, the Scheme only protects companies that are regulated by the Financial Conduct Authority.
There are lots of investment promoters and investment opportunities that aren’t regulated, meaning that if the organisation goes bust or the investment fails, you could be left with nothing. However, just because an investment isn’t regulated doesn’t mean it’s bad. It simply means it doesn’t carry protection. If your due diligence investigations reveal the investment is appropriate for your circumstances, then it could well be worth considering.
Finally, if you’ve received advice from a regulated adviser in connection with an unregulated investment, and you believe that advice was inappropriate, you could consider approaching the Financial Ombudsman Service or you could consider claiming on the adviser's professional indemnity insurance. And should the adviser go bust, you may qualify for a payout from the Financial Services Compensation Scheme of up to £50,000.
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