Your cash and pension pots are protected despite banks runs

There’s nothing more disconcerting than news of bank runs, government bailouts and plummeting bank stock prices – all of which we’ve seen in the past week. Silicon Valley Bank in the US collapsed and HSBC had to bail out its UK branch. So troubled banking giant Credit Suisse announced it had secured a £45bn lifeline from the Swiss central bank. Meanwhile, UK bank stocks have been rocked.

But although the headlines may give the impression that they are referring to the global financial crisis, the circumstances are very different.

Banks are in much better shape than in 2008. They have to comply with tighter regulations from the Bank of England and they are regularly stress tested to see how they would fare in a variety of difficult events . Even in the event of a problem, British savers and investors benefit from a number of protections.

YOUR MONEY SAVINGS

In the highly unlikely event that your bank, building society or credit union goes bankrupt, you should get your savings back, provided you meet certain conditions.

First, the provider holding your money must be authorized by the Financial Conduct Authority (FCA) and covered by the Financial Services Compensation Scheme (FSCS). They should clearly advertise if they have this coverage. You can also visit the FSCS website at fscs.org.uk/check/check-your-money-is-protected.

Crisis: US tech bank Silicon Valley Bank collapsed after companies withdrew deposits

Second, you’ll only get back up to £85,000 in bank savings. If you have a joint account you are covered up to £170,000. Laura Suter, personal finance manager at investment platform AJ Bell, says: “This means ideally you don’t want more than £85,000 with each provider, even if they’re spread across different accounts.”

The protection applies to all accounts held within the banking group, not per account, so watch out for banks with a number of brand names. For example, First Direct is owned by HSBC and Royal Bank of Scotland is another brand of NatWest bank.

You can get protection of up to £1 million for up to six months if you have a temporarily high balance.

YOUR INVESTMENTS

Your investment provider must not go bankrupt. They are very tightly regulated precisely so that they do not. Even if this is the case, your provider should keep your money safe in a separate customer account. If something goes wrong, you should receive FSCS protection worth up to £85,000. In addition, if an authorized firm gives you bad advice or is negligent in the management of your investments, you will be covered.

However, you will not be compensated if the value of your investments declines due to fluctuations in the financial markets. This is only part of the risk of investing.

Before investing, check that the company is authorized by the Financial Conduct Authority or the Prudential Regulation Authority. Make sure they are regulated to carry out the particular activity they offer you, such as giving investment advice.

Some types of investments do not offer any protection. These include cryptocurrencies, mini-bonds, and peer-to-peer lending.

YOUR RETIREMENT

If your pension provider goes bankrupt, the compensation you are entitled to will be determined by the type of pension you receive and whether it is regulated by the FCA.

Defined contribution pension plans: these are pension plans in which you and your employer pay a fixed monthly amount.

Although these plans are organized by your employer, your money is held and managed by a separate pension organization. This means that if your employer goes bankrupt, it will not affect your retirement assets. Whether your savings are protected by the FSCS in the event of a pension provider going bankrupt depends on how your scheme was set up. You can check this with your pension fund.

Self-invested personal pensions: In most cases, if your self-invested personal pension provider (Sipp) went bankrupt, you would receive up to £85,000 in FSCS compensation.

However, some providers structure their Sipps so that all of your savings are covered. Ask your provider what protection they offer.

Defined benefit pension plans: Also known as final salary, this type of workplace pension plan provides guaranteed income in retirement. It is your employer’s responsibility to ensure that there is enough money available to pay.

Pension funds are usually insulated from the company’s balance sheet, so even if your employer is in financial difficulty, your pension should be protected.

If the scheme cannot pay, your pension is taken over by the Pension Protection Fund (PPF), which is a bailout fund set up by the government.

Becky O’Connor, director of public affairs at pension provider PensionBee, said: “The PPF will pay you 100% of your pension if you have already reached retirement age from the scheme when your employer goes bankrupt.

“If you have not yet reached the retirement age of the scheme, you will only be entitled to 90% compensation, within a fixed limit.”