Got savings? Here's why FSCS savings safety protection is important

The Financial Services Compensation Scheme (FSCS) is a statutory compensation scheme set up by the UK Government back in 2001. Broadly speaking, the scheme exists to protect the deposits of savers in the event a particular bank, building society, or credit union goes bust.

Here’s everything you need to know about FSCS savings safety protection.

What does the FSCS cover?

If you’re a saver, FSCS savings safety protection means you can safely save up to £85,000 and not have worry about losing your hard-earned cash. That’s because if your bank or building society goes bust, any savings you had should be returned to you within 7 working days. (Note: the protection limit is £170,000 for joint accounts).

Aside from savings deposits, the FSCS also covers cash held in a current account, cash ISA, small business account, and guaranteed equity bonds. Cash kept in a self-invested personal pension (SIPP) may also be covered under the FSCS.

Importantly, the protection only applies if your provider has a UK banking licence. While most banks and savings providers offering accounts to UK customers will have a UK banking licence, not all do. The good news is that it’s easy to check whether your money is covered. See the FSCS website for a list of providers that hold a UK banking licence.

What if your savings exceed the £85,000 FSCS limit?

When it comes to savings safety, the £85,000 FSCS limit applies to each ‘financial institution’. So, if you have more than £85,000 in savings, it’s wise spread your savings across institutions to avoid putting your cash at risk.

It’s worth noting that some banks share their FSCS protection with others. This is common among sister banks, such as Halifax and Bank of Scotland. Because of this, if you’ve more than £85,000, it’s really important to take note of the banks that share protection. This is so you don’t inadvertently save more than the FSCS limit in one institution.

To see which banks share their protection, you can use the handy tool on the FSCS website.

Why is the FSCS needed?

While the FSCS was introduced back in 2001, it wasn’t really until 2008 that the world woke up to the fact that no financial institution was ‘too big’ to fail. During this challenging economic period the UK Government bailed out Lloyds and Royal Bank of Scotland. Meanwhile, Bradford & Bingley went to the wall during the same year.

Has the FSCS ever been used?

During the 2008 financial crisis, the FSCS was used to pay out £15.65 billion to affected Bradford & Bingley savers.

Who funds the FSCS?

Firms authorised by the Financial Conduct Authority and Prudential Regulation Authority pay a levy which funds the annual cost of running the FSCS. This means that, in theory, taxpayers shouldn’t have to foot the bill should savers need to turn to the FSCS in future.

Is it possible to have more than £85,000 protection?

Yes, it is possible to get more than £85,000 savings safety protection on temporary high balances. That’s because the FSCS can cover deposits up to £1 million for six months if you receive a large sum into your bank account following a major life event. For example, you may have a large sum because you’ve sold a property you live in, or you receive a hefty redundancy, or insurance pay out.

This six-month boosted protection starts from the date the large sum hits your account. For more on this extra protection, including what is excluded, take a look at the temporary high balances page on the FSCS website.

Does FSCS savings safety cover investing?

The FSCS doesn’t apply to investing. However, it’s important to note that investing is totally different from saving. For example, deposit funds into a savings account and your money is technically being lent to a bank or building society. This means they are essentially in charge of your cash.

However, when you invest your capital is ringfenced. In other words, your investing platform doesn’t actually hold your money when it’s invested in assets. When investing, always be mindful that your capital is at risk.

Do you have zero protection if your savings are kept in an overseas account?

If you deposit funds in an overseas account - or simply an account that doesn’t have a UK banking licence - you won’t be able to benefit from FSCS savings safety protection.

However, this doesn’t necessarily mean you won’t be protected should your non-UK bank go bust. That’s because there are a number of countries – particularly in Europe – that have their own savings safety schemes.

For example, save in a bank with a French banking licence and you may be covered under France’s national deposit guarantee scheme – ‘Fonds de Garantie des Dépôts’. This protects saver’s deposits up to €100,000. However, dealing with an overseas compensation scheme may not be straightforward. Also, if things go wrong, you’ll be reliant on an overseas Government to help.

Why doesn’t NS&I use the FSCS?

National Savings & Investments (NS&I) is the Government’s own savings provider. If you have an NS&I account, you may notice your funds aren’t protected under the FSCS. However, this is nothing to worry about. That’s because anything you deposit into a NS&I account is fully backed by HM Treasury. This is the highest level of savings safety protection you can possibly get. In other words, the UK Government guarantees that your savings are safe, even if you have savings in excess of £85,000.

It is for this reason why those with very large savings, or those who don’t wish to spread their savings across multiple institutions, may be particularly attracted to NS&I accounts.

Are challenger banks covered under the FSCS?

There's no hard and fast rule. For example, challenger banks, Starling and Monzo, are covered under the FSCS. However, other challenger banks including Monese and Revolut, are classified as 'e-money institutions'. The UK Electronic Money Regulations applies to e-money institutions and not the FSCS.