Client Relationships Manager
Following a year of uncertainty, you may be worried about your finances. Covid-19 has had an impact in many ways, from reducing income to affecting investments. Some financial firms have also been affected and this may mean you’re concerned about how secure your assets are. The good news is that there are protective measures in place.
More than 4,000 financial firms are at heightened risk due to the Covid-19 crisis, according to the Financial Conduct Authority (FCA). The FCA added that nearly a third of these businesses could potentially harm consumers if they collapsed. The regulator said insurance intermediaries and brokers, payments and electrotonic money firms, and investment management companies experienced the largest drop in cash and assets. The firms at risk are mostly small and medium-sized.
If you’re worried about the security of your assets, the Financial Services Compensation Scheme (FSCS) can provide peace of mind, but it’s important to understand what it does and does not cover.
The government set up the FSCS in 2001 to protect consumers if a financial firm fails. In 2018/19 the FSCS paid out £473 million to over 425,000 customers who had been affected by a firm collapsing.
How much compensation you’re entitled to is dependent on the financial product you have.
If you hold money in cash, for example, your current account or a savings account, the FSCS covers up to £85,000 per eligible person, and up to £170,000 for joint accounts. To be eligible, the money must be saved with a UK-authorised bank, building society or credit union.
If you hold more than £85,000 in cash, it’s worth spreading it across several different providers to ensure all of it is protected. It’s important to note that some firms operate under different brand names that use the same banking licence. For instance, Nationwide also operate under the names Derbyshire Building Society and Cheshire Building Society, among others. In the unlikely event of Nationwide collapsing, only £85,000 would be protected, even if it were spread between these different brand names.
As a result, it’s important to check how firms are linked if your assets exceed the £85,000 threshold. The easiest way to do this is by checking the FCA’s financial services register.
In some cases, the threshold is temporarily increased to £1 million for 12 months. This provides you with increased protection if a significant amount is deposited in an account following certain life events, such as selling a property or receiving an inheritance, and means you don’t need to make immediate decisions to ensure your assets are protected.
Pensions are likely to be among the largest assets you have and are crucial for security in your later life. The good news is pensions are covered by the FSCS:
It’s important to note that the FSCS does not provide compensation based on investment performance. It provides cover if your pension provider were to collapse, not if your investments perform poorly. As a result, it’s still important that investment decisions reflect your risk profile and long-term goals.
If you have a defined benefit pension, you’re not covered by the FSCS. Instead, these are covered by the Pension Protection Fund.
Your investments may also be protected. Some investments come under the FSCS if a firm has failed, with an £85,000 limit per eligible person, per firm.
Again, the FSCS only covers you if a firm fails, not if your investment values fall. You should ensure your investment portfolio aligns with your risk profile and wider financial plan.
Other financial services may be covered by the FSCS too, including debt management, mortgages, and insurance policies. Before you take out a product, open an account, or use a service, it’s worth checking if you’ll be covered by the FSCS. It can provide confidence and peace of mind.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
