Financial Services Compensation Scheme (FSCS)
Suddenly, investor protection was the priority and everyone became aware of the Financial Services Compensation Scheme (FSCS) and what protection it gave them. At the time deposit investments with any institution were protected up to £50,000 per saver and hence forwarded anyone with substantial sums on deposits limited their exposure to this amount, even if it meant that they didn’t get the best rates of interest on all of their savings.
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
Obviously the first thing is to try and avoid the need to call on any compensation scheme in the first place so carrying out your own due diligence, especially in relation to the financial security of the company holding your money is key.
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.
With mutual funds the good news is that your money is segregated from the fund managers’ own monies preventing any issues should they become insolvent. However if a fund manager act dishonestly or fraudulently then your FSCS cover would provide protection but this is restricted to £50,000 per institution.
Pensions and Investment Bonds
The most generous protection is reserved for contracts of insurance including life insurance investment bonds and Personal Pensions which are covered up to 90% of the value of your investment, with no upper limit. This will be particularly reassuring to anyone that has built up a large pension fund; however it does not apply to Self-Invested Personal Pensions (SIPPs).
Self-Invested Personal Pensions (SIPPs)
Just like mutual funds the assets are held in nominee accounts to ring fence them from the main company and any outstanding creditors of the SIPP provider. The protection you then receive on your underlying investments of the SIPP will based on whether they are deposits, mutual or insured funds. As before any multiple holdings you have with the same bank or fund manager (in or out of the SIPP) may be aggregated across your entire exposure to that company.
Keep these limits in mind when deciding how to structure your financial portfolio.