How the Financial Services Compensation Scheme protects you
Chris Broome – Chartered Financial Planner
Following a couple of years of uncertainty, you may be worried about your finances. Covid-19 has had an impact in many ways, from reducing income to affecting investments. Some financial firms have also been affected and this may mean you’re concerned about how secure your assets are. The good news is that there are protective measures in place.
More than 4,000 financial firms are at heightened risk due to the Covid-19 crisis, according to the Financial Conduct Authority (FCA). The FCA added that nearly a third of these businesses could potentially harm consumers if they collapsed. The regulator said insurance intermediaries and brokers, payments and electrotonic money firms, and investment management companies experienced the largest drop in cash and assets. The firms at risk are mostly small and medium-sized.
If you’re worried about the security of your assets, the Financial Services Compensation Scheme (FSCS) can provide peace of mind, but it’s important to understand what it does and does not cover.
What is the Financial Services Compensation Scheme?
The government set up the FSCS in 2001 to protect consumers if a financial firm fails. In 2018/19 the FSCS paid out £473 million to over 425,000 customers who had been affected by a firm collapsing.
How much compensation you’re entitled to is dependent on the financial product you have.
If you hold money in cash, for example, your current account or a savings account, the FSCS covers up to £85,000 per eligible person, and up to £170,000 for joint accounts. To be eligible, the money must be saved with a UK-authorised bank, building society or credit union.
If you hold more than £85,000 in cash, it’s worth spreading it across several different providers to ensure all of it is protected. It’s important to note that some firms operate under different brand names that use the same banking licence. For instance, Nationwide also operate under the names Derbyshire Building Society and Cheshire Building Society, among others. In the unlikely event of Nationwide collapsing, only £85,000 would be protected, even if it were spread between these different brand names.
As a result, it’s important to check how firms are linked if your assets exceed the £85,000 threshold. The easiest way to do this is by checking the FCA’s financial services register.
In some cases, the threshold is temporarily increased to £1 million for 12 months. This provides you with increased protection if a significant amount is deposited in an account following certain life events, such as selling a property or receiving an inheritance, and means you don’t need to make immediate decisions to ensure your assets are protected.
Pensions are likely to be among the largest assets you have and are crucial for security in your later life. The good news is pensions are covered by the FSCS:
- If a pension provider fails, you’d receive 100% compensation, with no upper limit. This will include defined contribution pensions, such as your workplace pension.
- Up to £85,000 per eligible person, per firm if your self-invested personal pension (SIPP) operator fails.
It’s important to note that the FSCS does not provide compensation based on investment performance. It provides cover if your pension provider were to collapse, not if your investments perform poorly. As a result, it’s still important that investment decisions reflect your risk profile and long-term goals.
If you have a defined benefit pension, you’re not covered by the FSCS. Instead, these are covered by the Pension Protection Fund.
Your investments may also be protected. Some investments come under the FSCS if a firm has failed, with an £85,000 limit per eligible person, per firm.
Again, the FSCS only covers you if a firm fails, not if your investment values fall. You should ensure your investment portfolio aligns with your risk profile and wider financial plan.
Other financial services may be covered by the FSCS too, including debt management, mortgages, and insurance policies. Before you take out a product, open an account, or use a service, it’s worth checking if you’ll be covered by the FSCS. It can provide confidence and peace of mind.
3 things to do ensure you’re covered by the FSCS
1. Always check firms are regulated
Not all services and financial products offered are FCA regulated and if you took out one of these, you won’t be covered by the FSCS. This may be a bank that isn’t authorised in the UK or unregulated investments. You can use the FCA register to check.
2. Check your existing products
In most cases, your assets will be covered by the FSCS but it’s always worth checking, and ensuring you have not exceeded compensation limits.
3. Get in touch with us
We want you to have confidence in the products and services used as much as you do in your plans. If you have any questions about whether you’re covered and the risk to your assets, you can contact our team.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.