The recent troubles with Metro Bank may have you thinking about what happens to your money if your bank goes bust.
You may be aware of the Financial Services Compensation Scheme (FSCS) but how does it work? Can it be relied upon and has it been used successfully in the past?
As well as your pensions and investments, cash in bank accounts is still going to form a vital part of your financial plan in retirement. It will be needed to cover your regular spending and potentially bigger spending in the short term. It can also be really useful to hold cash and use it when investment markets are suffering from one of their temporary declines. It saves having to sell some of your investments at a low price.
So, it’s vital your cash is managed and protected appropriately.
What protection is in place if your bank goes bust
If your bank goes bust, there is a chance it may get taken over by another bank. We have seen this recently in Switzerland where UBS agreed to by Credit Suisse.
If it is a bank that is deemed to big to fail it may get bailed out by the government.
If neither of these options work and the bank is truly left to go bust, then this is when the Financial Services Compensation Scheme could step in.
The FSCS will compensate you up to £85,000 if you hold money with a UK authorised bank, building society or credit union and the institution fails.
For a couple with a joint account or money with the same bank, they get protection up to £85,000 each, so £170,000 altogether.
The protection limit applies to the total money you hold with a company or companies working under the same banking licence. Not £85,000 per account you hold with them.
For example, First Direct and HSBC both work under the same banking licence so if you held money with both banks you would only be covered up to £85,000 across both banks.
If you held money with Lloyds Bank and Barclays you would be covered up to £85,000 twice as these banks operate under a different banking licence.
It’s important to check that the company you place your money with is in fact covered under the FSCS.
Some of the new and upcoming internet only money accounts like Revolut do not actually have a UK banking licence and are instead classed as an electronic money institution. This means they are not covered by the FSCS.
There are certain occasions when the FSCS protection may be more than £85,000 and this is usually when the amount of money you have in your account is larger than normal because of a certain event like selling your home, Compensation award, Inheritance or divorce payment.
In these scenarios the temporary high balance protection is up to £1million for six months.
Has the FSCS been used in the past?
The FSCS doesn’t just cover money with banks. It also covers things like mortgages, insurance, pensions and investments.
In the last accounting year 2022/23 the FSCS paid out £403million to 67,908 customers.
For a specific banking example, you may remember back in 2008 lots of people held money with Icelandic banks. Although not a UK bank the FSCS did step in and paid out around £1.4billion to UK customers following the failure of Icesave.
In 2008 around £20.4billion was paid out to the customers of five banks, protecting around four million accounts.
How to use the FSCS
If you need to claim from the FSCS because your bank goes bust, then you don’t actually need to do anything. The FSCS say they will return your money to you automatically, usually within seven days.
For claims relating to pensions or investments then you will need to apply online and supply evidence. Claims will then be assessed so this process will take longer.
How to protect yourself before a bank goes bust
Whilst the FSCS does provide some security to the UK banking system it’s always good to be in control of your own destiny to some degree.
The problem with bank failures is that they can happen fast and it can lead to contagion. Other banks can go down like dominoes.
The best thing to do to protect yourself is to diversify. Just like with investing, don’t have all your eggs in one basket.
Firstly though, you need to ask yourself why you are holding so much cash. Over the long run cash will see its purchasing power eroded by inflation so cash should only be used to cover short term expenses. Perhaps covering up to three years’ worth of spending in retirement.
For the cash you hold, if you can, make sure you don’t hold more than £85,000 per banking licence.
If you’re a couple, move money into both names so you use both of your £85,000 protection rather than being reliant on just one person.
Try and hold money in a few different accounts. Always include at least one of the UK’s biggest banks like HSBC, Lloyds or Barclays. Although not certain, these banks could be deemed too big to fail.
If you don’t have the time or inclination or struggle to spread your money around enough banking licences, then you can always consider National Savings and Investments (NS&I) accounts. They are part of the government and guarantee 100% of the money you have with them.
If you would like to get your family financial affairs in order and create a protected succession plan then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.