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How safe are my savings?

You might well be wondering if the worst happens, would your savings be safe?

Luckily, the Financial Services Compensation Scheme (FSCS) offers a safety net for UK savers and “protects you when financial firms fail”. This independent scheme was set up by the government and is funded by the financial services industry. It's free to consumers, and can be accessed by individuals and small businesses.

The FSCS covers your cash savings up to £85,000 per UK-regulated financial institution in the event that it goes bust. The types of institutions covered by the scheme include banks and building societies, credit unions, investment firms, pension providers, insurers and debt management companies.

What if you have a large savings pot?

Since 2015, the terms of the FSCS have also included temporary cover for cash balances up to £1m if you have acquired the money as the result of a 'life event' such as the sale of your house, a redundancy payout, or an inheritance.

The scheme covers this cash for six months from the date it lands in your account, or the date you become entitled to the money, whichever is later. Although, you will need to be able to prove the source of the funds if you make a claim for compensation.

What if you save with a foreign bank?

Some overseas banks, such as the Spanish bank Santander, are UK-regulated and therefore covered by UK rules, but other European institutions that do business here may use 'passport scheme' under which consumer protection comes from their home government.

This means they may not be as easy to access or as reliable as the UK's scheme, and compensation limits may be lower. Money saved in offshore accounts will not usually be covered by the FSCS, but it depends where the institution is regulated.

What if you have a joint savings account?

If you have a joint savings account with your spouse or partner, for example, you are each covered up to the £85,000 limit, so the savings in your joint account would be protected up to £170,000.

What about pensions and investments?

Investments are covered up to £50,000 per person, per firm. But bear in mind you cannot make a claim if your investments fall in value as a result of market movements, as this is just a risk you take with investing. The scheme only pays out if your investment firm goes into default. If you have cash savings in a Self-Invested Personal Pension (SIPP), it would be covered up to £85,000, separately from the investment protection.

How can you protect your savings?

Even the experts couldn't predict which banks were going to fail back in 2008, so it's unlikely you will know if your savings provider is at risk until it's too late. If you have more than £85,000 saved, it's a good idea to think about spreading it across a few different providers to ensure as much of it as possible will be covered in case an institution fails.

You can choose the top few savings accounts in the marketplace to maximise the interest you earn, but you need to make sure you choose products from truly separate financial institutions. For example, if you held accounts with two different high street banks that were owned by the same parent company, you would only be covered up to £85,000 in total across those accounts. 

And remember that savings products from National Savings & Investments are 100% backed by the UK government, although rates are often less competitive than from banks and building societies. 

To spread your risk, you could also deploy some of your savings elsewhere, such as using them to overpay on your mortgage.