BLOG: Savings & investments – Safe as houses?
In September 2007, customers of the bank feared losing all their money if Northern Rock went bust, with many rushing to withdraw their savings as quickly as possible. As a result the UK suffered its first bank run in 150 years.
In the end the government had to step in, pledging to underwrite all deposits. This 100% guarantee on savings was eventually withdrawn and moved into line with the compensation available to the rest of the UK banking sector. However, the Northern Rock-panic underpinned the importance of knowing whether or not your savings and investments are protected, and to what extent.
This week the Bank of England published a number of papers proposing changes to improve the resilience of banks.
Currently £85,000 of depositors’ savings will be protected by the Financial Services Compensation Scheme (FSCS) if a bank goes bust.
Prior to Northern Rock’s collapse, the FSCS only protected 100% of the first £2,000 and 90 per cent of the next £33,000, which meant many customers would have lost several thousand pounds if the government hadn’t stepped in to guarantee all deposits.
Under the new proposals, FSCS protection could be raised to as much as £1million to cover those who have large sums temporarily deposited in their account because of a house sale, personal injury payout, retirement pay or a divorce settlement, among others.
Customers would have to supply written evidence to prove that their high savings balances came from one of these sources.
The new limit will only apply to money deposited for a period of six months or less, in order to protect those with a temporarily high balance in their accounts, rather than wealthy savers who have not split their money between different banks.
As it stands, those with savings over the £85,000 protection limit are encouraged to spread this out between different institutions to ensure that all their money is safe. However, it can be confusing when several different banks operate under the same banking licence, and hence share the compensation coverage limit.
The changes, due to come into force in July next year, are designed to minimise disruption to accounts if a lender goes under. The aim is for accounts either to be quickly transferred to a new, solvent bank or for FSCS payouts to customers to be made in no more than seven days. Currently, compensation can take up to 20 days for more complex cases.
Protection for certain insurance policy holders is also set to be boosted, to cover situations where a provider fails. The limit will be increased from 90% to 100% cover for annuities, claims arising from death or incapacity and professional indemnity insurance.
Many investors will probably also be wondering what protection is currently available for investment wrappers such as ISAs and SIPPs.
All the assets in a SIPP or ISA are held in nominee accounts, ring-fenced from the main company. Nominee companies are generally non-trading, and so cannot run up liabilities of their own. This works a bit like a trust. The custodian of the nominee account – a third party, which is separate to the provider – is the legal owner, but the investor (you) are the beneficiary.
In the event of insolvency, any outstanding creditors of the ISA or SIPP provider will be unable to touch your money, which should ensure that you receive the full value of your investments.
A few other things to remember…
Even with the proposed changes, there are a few other important factors to bear in mind with regards to compensation cover:
· Remember that protection is offered per banking institution, not per account. This means the compensation coverage limit depends on the banking licence. For example there is just one compensation licence for Santander and its subsidiaries: Abbey, Alliance & Leicester, Bradford & Bingley while the Bank of Scotland shares
its licence with Halifax, BM Savings, AA, Aviva, Intelligent Finance and SAGA.
· You will only receive protection on the net value of your savings with that institution. So if you have a mortgage or overdraft with the same bank, the debt will be deducted from the value of your savings in order to determine your compensation.
· If you’re holding all your cash ISAs with a single provider – you may be in danger of breaching the £85,000 limit. With the ISA allowance increasing and the ability to transfer from stocks and shares ISAs to cash, savers need to be more wary of this risk.
· The compensation limit of £85,000 applies to each depositor for the total of their deposits with an organisation, regardless of how many accounts they hold or whether they are a single or joint account holder. In the case of a joint account, the FSCS will assume that the money in that account is split equally between account holders, unless evidence shows otherwise. This applies even if you have recently split up with your partner.
· The FSCS does not cover deposits outside the European Economic Area (EEA), or in the Channel Islands or Isle of Man.
· Need to check if your money is protected? Use the FSCS deposit protection checker tool at www.fscs.org.uk/protected/.