Before the Northern Rock crisis and the subsequent problems of Halifax/Bank of Scotland, Bradford & Bingley and Royal Bank of Scotland, few people would have worried about the prospect of a British bank going bust.
Nowadays, however, most savers are keen to know how their cash would be protected if their account provider went into administration. This guide explains how you're protected.
Find the best savings accounts
It is important to understand the rules around savings safety and be sure that your money has the maximum protection possible. It's also vital that your earning the best interest on your savings.
The Which? savings and Isa comparison tables let you search all available savings accounts and Isas from all available providers to choose the best savings rates based on quality of service as well as cost and benefits.
Which? Money Compare table: Savings accounts and cash Isas – compare hundreds of deals
What is the Financial Services Compensation Scheme?
The Financial Services Compensation Scheme (FSCS) offers a safety net for savers and investors in order to protect some of their cash if their account provider goes bust. It protects up to £85,000 of savings per individual, per financial institution.
If you have savings with a bank or building society authorised by the Financial Conduct Authority (FCA), and which goes under, you will get back the first £85,000 of your savings through the FSCS.
This £85,000 compensation includes any interest you will have accrued – so it's wise not to invest all the way up to the FSCS limit, instead leaving some 'space' in your savings account for your return to build up.
For example: if you receive 5% interest on your savings, you should only keep around £80,750 in your account.
Compensation limits apply to individuals not accounts, so if you hold a joint account your level of savings protection effectively doubles, because each person would be entitled to £85,000 in compensation from the FSCS if the worst should happen.
You could therefore safely hold up to £170,000 in a joint account.
However, it is vital to be aware that holding money in different accounts within the same bank will not offer you extra protection.
For example: if you held three lots of £85,000 in three separate accounts from Bank X and it went bankrupt, you would be guaranteed to get back just £85,000 of your savings – a third of the total you had invested.
The Bank of England has announced that temporary high balances resulting from house sales or inheritances will receive six months protection up to a sum of £1m as of July 2015.
Different banks can belong to the same financial institution
The hardest task is identifying which banking brands belong to the same financial institution, yet this is a crucial part of ensuring your savings are safe.
Banks or building societies that appear completely unrelated to one another may be part of the same financial institution, meaning only one dose of £85,000 FSCS protection will apply to the combined savings held in all of them.
Consequently, individuals who think they are saving safely may unwittingly be putting their money at risk.
It may not be immediately obvious that your savings provider is connected with another, entirely separate-looking bank, so make sure you read the next page, Who owns who in the savings market?.
Investments, mortgages and insurance
The Financial Services Compensation Scheme also covers investments, mortgages and insurance, up to certain limits. These limits vary depending on the type of product you have with the bank.
The list below highlights compensation levels for the most commonly held products. The rules for investments are complicated, so we've put together a guide explaining how your investments are protected.
Current limits for each product area are:
- Investments: 100% of the first £50,000. This will increase to £85,000 in April 2019.
- Mortgage advice and arranging: 100% of the first £50,000;
- Long-term insurance (eg life assurance): 100% of the claim;
- Compulsory general insurance (eg third-party motor insurance): 100% of the claim;
- Non-compulsory general insurance (eg home insurance): 90% of the claim;
- General insurance advice and arranging: 90% of the claim. Advice for compulsory insurance is also protected up to 90% of the claim.
Each product type is treated independently under FSCS rules, so if you choose to bank and invest with the same provider you would be entitled to compensation for each of the products you hold, up to the relevant FSCS limits