In the past the financial stability of banks, insurance companies and investment houses was probably not given the prominence it deserved by investors when deciding on a home for their money. Surely if you stuck with the large, well-known companies your money would be safe.
In 2008 this became a lesson sorely learned and hardly a week went by without the likes of Lehman Brothers, RBS and Northern Rock hitting the headlines.
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Financial Services Compensation Scheme (FSCS)
These limits have since increased to £85,000 but there is a widely held misconception that they apply to all investments, whether they are in deposit accounts, mutual funds or life assurance and pension funds. Before you decide on which tax wrapper you are going to use make sure that you are fully aware of what protection you have.
Check Financial Security and Company Structure
If you are investing in a deposit based investment then you are protected up to £85,000 per person per authorised institution. Care needs to be taken with larger institutions where separate authorisation may not exist for their different subsidiaries, (Santander is a good example of this), in which case only one limit will apply for all your accounts with them. This has become more of an issue in recent years with the number of bank and building society mergers taking place.
Individual FSCS coverage will not apply if an investor is regarded as a large company. This could happen where you invest in deposit accounts via an insured product such as an offshore bond. In those circumstances the pooled deposit account is held in the name of the product provider and the £85,000 protection is shared (once) amongst all the investors in that account. In 2008 a lot of investors who held their Icelandic deposit accounts in offshore bonds were caught out this way.
Pensions and Investment Bonds
Self-Invested Personal Pensions (SIPPs)
Keep these limits in mind when deciding how to structure your financial portfolio.