Wealthy saver? Beware upcoming compensation rule change

Changes to the Financial Services Compensation Scheme (FSCS) come into force on January 1, 2016.

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The protection limit offered by the government-backed FSCS will drop by £10,000 from £85,000 to £75,000 per bank or building society.

That means anyone with more than £75,000 in savings in one account could therefore be at risk.

Here, we answer your questions about the scheme – and how you can make sure your money is safe.

What is the current FSCS limit?
What is the new FSCS limit?
I am worried about my savings. Is there anything I can do?
When should I move my money?
What about institutions with several brand names?
What if I want to take money out of an account that does not allow withdrawals?
What happens if the interest I get on my account takes it over the £75,000 limit?
Are there any exemptions to the £75,000 limit?
My bank is not authorised in the UK. Are my savings at risk?
I have heard talk of a limit of £1m. What does that cover?

What is the FSCS?

The FSCS protects consumers if an authorised financial services firm goes bust. So, if you have savings in a UK-regulated bank or building society and it collapses, you will get your money back.

You can find out whether a firm is regulated by using the Financial Conduct Authority’s (FCA) firm check service.

You can also find out about the status of a firm by telephoning the FCA’s consumer helpline on 0800 111 6768.

What is the current FSCS limit?

The current limit for deposits is £85,000. The limit applies per person, which means a couple could put up to £170,000 in a savings account and their funds would be safe.

Watch out, though, as the limit applies per institution not per account.

In other words, if you (as an individual) have £50,000 in one account and £50,000 in another, both with the same bank, you would only get one lot of compensation if it collapsed.

In other words, you would be compensated up to the limit of £85,000. 

What is the new FSCS limit?

The new limit is falling to £75,000 on January 1, 2016 (or £150,000 if you have money in a joint account).

Why is the limit falling?

The limit is set at 100,000 euros across the European Economic Area, which includes the UK, and is reviewed every five years to take into account currency fluctuations.

At the review earlier this year, the relative weakness of the euro against the pound caused the limit to fall.

I am worried about my savings. Is there anything I can do?

Consumers have until the end of the year to make any adjustments to their savings accounts.

For example, if you have £80,000 in a savings account with one bank, you could move around £5,000 into an account with another bank in order to stay within the new, lower limit

For example, if you have £80,000 in a savings account with one bank, you could move around £5,000 into an account with another bank in order to stay within the new, lower limit.

It’s probably worth setting your new account below the £75,000 to allow for interest accrual.

Remember that you should switch the money to an account with a different bank or building society, or you will not be fully protected.

When should I move my money?

There’s a reasonable argument that you should sort out your accounts sooner rather than later so that you don’t forget to tackle the task, especially with Christmas on the horizon.

That said, banks and building societies are not required to attend to requests of this nature until October 1, 2015.

They then have a maximum of two months to return your funds to you, although they must have done so by the end of 2015.

You can, of course, still move your money next year if you choose not to this year.

What about institutions with several brand names?

You also have to check that the new institution does not operate under the same banking licence. Some banking groups own various different subsidiaries, all of which share the same licence.

HSBC and First Direct is one example. Another is that Yorkshire Building Society, Barnsley Building Society, Chelsea Building Society, Norwich & Peterborough Building Society and Egg are all part of the same group.

And Halifax, Bank of Scotland and Birmingham Midshires also operate under one licence. So a saver with £50,000 in Bank of Scotland and £50,000 in Birmingham Midshires would therefore only be able to claim compensation of £75,000 in 2016.

What if I want to take money out of an account that does not allow withdrawals?

Many of the top-paying savings accounts, usually fixed-rate bonds, charge a hefty penalty for withdrawals.

That means a saver who wanted to juggle their account balances to ensure continued 100% protection under the FSCS might therefore fear being excluded from adapting to the new regime.

But a deal has been struck to allow savers to withdraw funds between the old and the new limits without incurring a penalty or loss of interest.

For example, if you have £80,000 in a fixed-rate bond, you would be able to withdraw £5,000 cost-free.

What happens if the interest I get on my account takes it over the £75,000 limit?

Any interest you earn becomes part of the account balance, so if you burst the £75,000 limit thanks to interest earned, the slice above that amount will not be protected.

Are there any exemptions to the £75,000 limit?

FSCS protects certain types of deposits above £75,000, known as “temporary high balances” up to £1 million, for a period of six months.

These are described by FSCS as “exceptional and short-lived deposits which result from certain major life events” such as:

- Money deposited in preparation for buying a property, the proceeds of the sale of a property or proceeds from releasing equity in a property. This applies only to your main residence and excludes buy-to-let properties or holiday homes. General savings for a property do not qualify
- Money paid in relation to a marriage or civil partnership or a divorce or dissolution of a civil partnership
- A redundancy payout (whether voluntary or compulsory)
- Compensation paid for unfair dismissal
- Benefits paid in respect of a disability or incapacity/Compensation paid for personal injury (no limit applies here)
- Benefits paid under an insurance policy
- Compensation for a wrongful conviction
- Benefits paid on retirement
- Benefits payable on death
- Compensation in respect of a person’s death
- A legacy from the estate of a deceased person or money held on behalf of a deceased person for the purpose of administering their estate.

If a firm fails and you need to make a claim for deposits you have above £75,000, you will need to provide written evidence that your deposits qualify as a temporary high balance.

My bank is not authorised in the UK. Are my savings at risk?

All European banks have to guarantee savings up to the limit of 100,000 euros. If your bank is based outside Europe, then it would normally have to apply for a UK licence so would fall under the FSCS. If you are concerned, you should contact the provider.

I have heard talk of a limit of £1m. What does that cover?

Since July savings of up to £1m can be protected for up to six months, but only if the funds are for ‘life events’. So, if you have a lot of money in your account because you have just sold your house or just received a redundancy package or divorce settlement, a temporary limit of £1m would apply.   

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