A number of banks were severely weakened during the recent financial crisis. The near-collapse of the Co-operative Bank in 2013 shows that this remains a cause for concern. So, for savers, it’s worth taking the steps to ensure that your deposits are safe in case your bank or building society goes bust.
The good news is that UK savers are protected for a large chunk of their savings by the Financial Services Compensation Scheme. This scheme covers deposits in current accounts, savings accounts, bonds and ISAs up to £85,000 per person per institution. For joint-accounts, the compensation limit is doubled to £170,000.
It’s fairly straightforward, but there are a number of complications. What is an institution, for example?
The definition of an ‘institution’ relates to the registration that a bank or building society holds with the compensation scheme.
Many banks hold individual registrations with the FSCS. This means that deposits up to the £85,000 limit will be covered in each one.
But many banks and building societies share a registration, often as a result of a merger or a takeover. This means that the £85,000 cover is for deposits across all of these brands together rather than each one individually.
If, for example, you had £50,000 invested in Nationwide, and £50,000 in the Halifax, you should be perfectly safe, as these are both separate institutions.
If you had £50,000 in Nationwide and £50,000 in the Cheshire Building Society, on the other hand, £15,000 of this would be at risk since these two share the same FSCS registration.
So if you have a large volume of savings, it’s important to establish where you can deposit your money to ensure that it’s all safe. [See the full table of groups here, and find out if your bank shares its banking licence.]
There are exceptions to most rules, and this is no different. A small number of banks operating in the UK are based overseas. Most of these are covered by the FSCS in the same way as domestic banks, but a couple use the “passport” compensation scheme of €100,000 through their home governments. [Find out more.]
This is significant because there is no cast iron guarantee that foreign compensation schemes will pay out. It relies on the co-operation of a foreign government which might want to prioritise its own people first. This may be worth considering before committing a large volume of savings to a ‘passport’ protected bank.
So, what steps can you take to protect your savings?
- Limit your deposits to £85,000 in any one FSCS registered institution.
- If you have more, consider opening accounts with different institutions and investing no more than £85,000 in each one.
- It’s worth noting that this limit also includes interest. So, if you invest a few thousand pounds below the maximum, this will ensure that interest can be factored into a compensation claim.
- Alternatively, why not consider investing in a government-supported scheme, such as National Savings & Investments (NS&I), which is supported by the Treasury. You can’t get much safer than that!
So, hopefully now you feel better informed about the security of your savings. While it’s unlikely that your deposits will come to any harm, one thing we’ve learnt throughout this crisis is that it’s usually best not to take any chances.