It’s many people’s worst nightmare. You spend years carefully squirrelling away your money, only for a financial firm to go bust, taking your hard-earned savings with it.

The financial crisis which first unfolded in 2008 saw five UK banks fail, which affected more than four million people’s accounts. Thankfully, the Financial Services Compensation Scheme (FSCS) stepped in to compensate these account holders with around £20.4 billion.

If you’re worried about what would happen to your cash if your bank or savings provider were to fold, don’t panic, as the FSCS can provide valuable protection. Here, we walk you through how the FSCS works, what level of compensation it offers, and how to access this safety net, if needed.

What is the Financial Service Compensation Scheme?

Initially set up in 2001, the FSCS is the UK’s financial compensation service that steps in when financial institutions fail and are unable to pay customers’ claims. Over the years, it has paid out billions of pounds in compensation for a wide range of financial products, from current accounts to insurance.

For the scheme to work, financial firms must be authorised by either the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) and pay the FSCS an annual levy for its services. Effectively this means that banks, building societies, and insurance brokers, among other financial firms, pay the FSCS to provide a level of insurance for their customers’ money.

You can check if your financial institution is authorised by the FCA or PRA through the Financial Services Register. If the company that has failed was not part of the FCA or PRA, you will not have protection from the FSCS.

The FSCS provides compensation for more than just banks that have gone bust. It covers a wide range of financial services and products, including poor financial advice, debt management, investments, pensions, insurance, mortgages and payment protection insurance (PPI).

When might I be eligible for compensation?

If you find yourself in any of the following situations, you might be eligible for compensation:
  • If your bank, building society or credit union fails and you lost money that you deposited with them. It’s worth noting that you will only be covered for £85,000 with a single institution, so if you have two accounts with the same bank which together hold more than £85,000, you won’t get the full amount back.
  • If your insurance company has gone under, the FSCS may cover your claim or transfer your policy if you have a protected claim. The types of claims usually covered result from third-party motor, life insurance, critical illness insurance, insured personal pensions, and income protection insurance, among others.
  • If your pension provider has gone out of business, and you have lost your pension savings as a result.
  • If you have an investment (or you were advised to invest) and the provider or adviser has gone bust.
  • You were given poor financial advice which meant you lost money, or your financial services provider committed fraud.
The amount of compensation you are eligible for depends on the type of product you held with your financial institution. The FSCS will cover different percentages of different products up to a maximum value. For example, at the time of writing it covers the following:
Financial Product Percentage covered Maximum compensation available
Deposits with banks / building societies or credit union 100% of first £85,000 for single accounts or £170,000 for joint accounts per firm £85,000 for single accounts £170,000 for joint accounts per firm
Protected claims listed above 100% of the claim with no upper limit Unlimited
General insurance provision (i.e. travel, home, dental etc) 90% of the claim with no upper limit Unlimited
Investments 100% of the first £85,000 per person per firm £85,000
Mortgage related products 100% of first £85,000 per eligible person per firm £85,000
Source: FSCS The specific inclusions and exclusions for each of the above are fairly complex, so the best way to see if you can claim compensation is to use the FSCS’ claim eligibility tool.

Are my investments protected by the FSCS?

Investments are inherently risky, with the possibility that you might lose as well as gain money. Simply losing money on an investment because that investment has performed badly does not mean that you would be eligible for compensation. The key reasons you might want to claim compensation from FSCS concerning particular investments is if the business you held the investments with failed, or in the case of fraud or poor financial advice.

However, beware that some investments aren’t regulated, such as cryptocurrencies, which have exploded in popularity over recent years. So, you won’t receive the protection of the FSCS if something goes wrong, such as an exchange going bust.

If you’ve bought investments via a regulated investment service or platform, your money must by law be held on trust and be kept separate from the service’s own funds. This means that if the platform runs into difficulties, your money can’t be used to cover its financial obligations and creditors won’t have any right to it.

The FCA requires investment services to hold capital in order to cover their administration costs if they cease trading. If these costs can’t be covered by the capital held, money can be taken from customers. However, if this were to happen, you’d be eligible to claim under the FSCS, up to a limit of £85,000.

Is my pension protected?

If you have a pension, or were advised to get one (or transfer to one), and your provider has gone out of business, you might be eligible for compensation. You’ll only be protected by the FSCS if your pension provider or adviser was authorised by the Financial Conduct Authority.

Generally only defined contribution pension schemes (also known as money purchase pensions) will be covered by the FSCS.

The maximum compensation payouts are slightly different depending on the type of pension and date that your pension provider failed on. If the firm failed after 1 April 2019 and:

  • If your pension provider fails you could be eligible for 100% of your claim, with no upper limit. This type of pension compensation is generally for long-term insurance contracts such as an annuity.
  • If you have a self-invested personal pension (SIPP) and your operator fails, you are entitled to up to £85,000 per firm.
  • If you have received bad pension advice and you lost money as a result, you could be eligible to claim up to £85,000 per firm.

If your provider failed before 1 April 2019, the amount you are entitled to is different. You can check the amounts you might be entitled to here.

It can be tricky to understand what is and isn’t covered, however. So, if you are concerned about whether your pension is protected, it is best to use the FSCS’ pension protection checker which can help you understand what protection you have.

If you have a defined benefit pension and your employer goes out of business, the Pension Protection Fund is the service you will need to use to see if you are eligible for any compensation. It will usually pay you up to 100% of the value of your pension if you’ve reached the scheme’s retirement age, or 90% if you’re below the scheme’s retirement age.

Compensation for temporary high balances

If a large amount of money was recently deposited into your account and then your bank went bust, you might be eligible for more compensation than the limits outlined above.

The FSCS will cover you for up to £1 million if you were paid an unusually high amount of money within the last six months due to certain life events such as inheritance, property sale, compensation payments, retirement payouts, or redundancy payment, for example. The protection on the temporarily high balance will kick in from the day the money is deposited into your account.

You do not need to tell the FSCS if you have a balance higher than £85,000 as they will automatically look at your deposits if your bank fails, but they may ask for evidence of where the money came from which might include documents such as a will, property sale receipt or agreement, or a court judgement, for example.

How do I make a compensation claim?

If the compensation you are owed is due to your bank, building society or credit union going bust, then the FSCS will automatically process your claim and issue compensation. It will usually do this within seven to ten days of your bank, building society or credit union failing, depending on the complexity of your account.

If the compensation you believe you are owed is for any other reason then you first need to check your eligibility with the FSCS’ claim eligibility tool. If you find that you are eligible to make a claim, you will need to create an account and complete an application form. It’s important to note that claiming through the FSCS is completely free, but there are some companies out there that will charge you to help you make your claim and manage your account for you. Beware that taking this route could take a chunk out of any compensation you receive.

The application can be lengthy and it’s likely that the FSCS will need a lot of information and evidence from you to verify your claim. It’s worth spending some time gathering as much of the paperwork you have to hand as possible, to make sure the process moves as quickly as it can.

The FSCS says that claims are currently taking:

Claim type8 out of 10 customers get their decision within
General or life insurance4 months
Investments6 months
Mortgage advice2 months
Mortgage endowment3 months
Pensions12 months
PPI3 months
Whole of life insurance4 months

How can I keep my money safe?

There are a few key things you can do to make sure your money is protected if your bank goes bust:

Split your savings between different financial institutions

The FSCS will only compensate you with a maximum pay out of £85,000 per financial institution, so if you have more than £85,000 in savings with one financial institution, then it’s worth moving the additional amount you have to a different bank.

Check who owns your bank

Some brands are owned by the same banking company. For example, Lloyds Bank owns Cheltenham & Gloucester, so if you had £60,000 with Lloyds and £30,000 with Cheltenham & Gloucester, you would have a total of £90,000 with Lloyds Bank Plc. That means £5,000 would not be covered by the FSCS.

Which? has a useful tool that can help you understand which financial firms are part of the same group.

Consider opening a joint account

While the FSCS’ individual maximum compensation payout is £85,000, if you have a joint account, this amount doubles to £170,000. So, if you and your partner don’t want to move your savings to different bank accounts, opening a joint account could be a solution.

Check if your firm is authorised by the FCA or PRA

The FSCS only provides protection to financial institutions that are authorised by either the FCA or PRA, so when looking at investing or placing your money with any business, check if they are part of the scheme. Check with your particular provider, too, that they are covered by the FSCS.

Think twice before moving money offshore

The FSCS only provides protection for UK-based banks, so if you have money in other countries, you will be subject to their financial compensation schemes, if they have one. It’s worth checking whether your money is protected, as although you may be benefiting from low tax rates, you might get stung if your financial institution goes under.

Have you experienced your bank failing and made a claim through the FSCS? Do you have any additional suggestions that might help others keep their money safe? You can join the money conversation on the Rest Less Community or leave a comment below.

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