This article was originally posted in November, but the FSCS limit was reduced on 1st January 2015, so it is worth repeating.

You may have heard that the Financial Services Compensation Scheme limits are reducing in January. In this article we will try to answer the most commonly asked questions about the scheme, as well as highlighting a little-known caveat that can protect up to £1M in a single bank in certain circumstances.

What is the Financial Services Compensation Scheme (FSCS)?

The FSCS is in place to protect individuals and small businesses from the collapse of, or mis-selling by, authorised financial services firms. The FSCS protects banks and building societies, Credit Unions, Insurance, Home Finance, Investments, Pensions and Endowments, although people are most aware of the cover provided for cash savings.

It was created following the banking crisis in 2008, with the aim to give savers confidence that their money was safe with British institutions.

How much of my money is covered under the scheme?

With cash savings, since December 2010 the FSCS has covered savings of up to £85,000 per person per banking license (therefore if a joint account is held, the limit would be £170,000) if the bank was unable to pay claims due to default or bankruptcy, although this is due to change in January 2015. Almost all UK-based banks and building societies are covered by the scheme, although some banks share licenses (for example First Direct and HSBC) and so care should be taken to ensure the banking licenses are truly separate. More information is available online, or one of our financial planners will be happy to check this for you.

With regards to the other areas of protection, each section has its own rules. For most investments the compensation limit is £50,000 per person per firm, but the specifics can be complex. Full details can be found at the FSCS website.

What are the changes?

The Prudential Regulation Authority has announced that from 1st January 2016, this compensation limit will be reduced to £75,000 per person per firm. The reason for this change is that the figures are set against an equivalent of €100,000, calculated every 5 years, and the pound has appreciated against the Euro since 2010.

This means that many savers who made sure not to exceed £85,000 per bank may now find they need to move money to other accounts to stay within the limits. Where there are fixed-rate bonds most banks have confirmed they will allow savers to make early withdrawals in this case, even if the rules of the account would usually prevent them.

Temporary High Balances

From 3rd July 2015, the FSCS has provided a £1 million protection limit for temporary high balances held with banks, building societies or credit union if it fails.

The temporary high balance limit applies when a major life event leads to a large amount of money being held in a person’s account, and the higher limit applies for up to six months, after which the cover falls back to the usual limit.

To be eligible for the temporary high balance limit, the following life events must have occurred and proof of evidence may be needed on request:

  • Real estate transaction (e.g. property purchase)
  • Benefits payable under an insurance policy
  • Personal injury compensation
  • Disability or incapacity
  • Claim for compensation for wrongful conviction
  • Claim for compensation for unfair dismissal
  • Redundancy
  • Marriage or civil partnership
  • Divorce of dissolution of civil partnership
  • Benefits payable on retirement
  • Benefits payable on death
  • A claim for compensation in respect of a person’s death
  • Inheritance
  • Proceeds from a deceased estate held by the estate’s personal representative

The NS&I

It is also worth mentioning that the NS&I, most well-known for the Premium Bonds, offers unlimited protection for savings, as it is a wholly owned subsidiary of the government. Whilst the interest rates are rarely market-leading, they do offer instant access accounts that can be managed online or by telephone and can be a very convenient solution if large amounts of cash need to be left on deposit for some time.

Conclusion

With the FSCS protection being reduced, it is a good time to review your savings arrangements. The extra cover provided due to major life events will be very useful where clients know that money will only be in the account temporarily (for example when selling and buying a property).