Savers' protection against a bank or building society going bust jumps to £85,000 under new rules that apply from today.
If your provider fails, the Government-backed Financial Services Compensation scheme (FSCS) promises to pay out the first £85,000 per person, per UK regulated financial institution to bring us in line with the €100,000 EU cap.
The previous guarantee was for the first £50,000 (see the Safe Savings guide).
As the safety net is per person, £170,000 of cash in a joint account is protected.
Here's what else has changed and what you should consider – even for those with smaller pots of savings.
- Building society protection cut.
Before today, if you had money in a merged building society such as Nationwide and Cheshire, you had £50,000 protection in each. Now, it's £85,000 combined.
- Faster payouts.
If required, the FSCS will make most payments within seven calendar days of the provider failing and the remainder within the required 20 working days. There was no stipulated time frame previously. When Icesave failed in 2008 compensation took a few months.
- Offsetting overhaul.
If you have savings and debt with the same institution they will be treated separately if it goes bust. So savings will be protected as normal while you will still owe the full debt.
Previously, your debt would reduce by the amount of savings you had. So if you had £30,000 debt and £20,000 savings you would not get any money back but you would instead owe £10,000. Using that example, you'd get £20,000 back but still owe £30,000 now.
- Offset mortgage changes. The exceptions to the above are, firstly, where a homeowner has a current account mortgage which is effectively a massive overdraft. Here, savings would be subtracted from the total debt.
If you have an offset mortgage, where savings reduce the amount of interest you pay, you would receive up to £85,000 savings back and still owe the mortgage balance. Any savings above £85,000 would be subtracted from the debt.
What's not changed
- The institution not the bank counts.
Sadly, one aspect that doesn't change is what is classed as a financial institution, which can be highly confusing.
It's all about how many bank licences each firm holds. Sister banks Halifax and Bank of Scotland share a licence, so total protection's £85,000 for all accounts in both. Yet other sisters Natwest and RBS have separate licences so you get £85,000 in EACH (see the Who owns who guide).
- Not all UK savings get UK protection. Some EU banks rely on their home country's protection. For example, ING Direct savers depend on a Dutch government pay out, while Anglo Irish savers are dependent on the Irish scheme. This doesn't apply to all overseas banks. Santander, for example, has full UK protection (see Overseas banks protection).
Use fewer accounts to earn more
The golden rule has always been to spread savings in different institutions to get 100% protection.
The new cap means if you've big savings, say from selling a house, you need fewer accounts. If you have £160,000 you need accounts with two institutions to be safe rather than the previous four.
So consolidate into the highest payers (see the Top Savings guide for the best deals).
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