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How safe is my money (1)

Created:
13 May 2008
Written by:
Moira O'Neill

"The maximum compensation paid for UK bank deposits is £35,000, but is there a compensation scheme or limit for individual savings account (Isa) funds?"

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Moira O'Neill, personal finance editor, replies: "Deposits and Isa funds are both covered by the Financial Services Compensation Scheme (FSCS). This is an independent body, set up under the Financial Services & Markets Act 2000 as the UK's compensation fund of last resort for customers of financial services firms.

The FSCS can pay compensation to consumers if an authorised financial services firm is unable, or likely to be unable, to pay claims against it. This will generally be because it has stopped trading and has insufficient assets to meet claims, or is in insolvency.

The service is free to consumers. FSCS is funded by levies on authorised firms (those regulated by the UK's financial watchdog, the Financial Services Authority (FSA) or previous financial regulators).

As a fund of last resort there are limits to what FSCS can do and to the amounts of compensation the scheme can pay.

The maximum level of compensation for deposits is £35,000 per person (for claims against companies declared in default from 1 October 2007). The FSCS will pay 100 per cent of the first £35,000.

Investments (including Isa funds) have a higher compensation limit of £48,000 per person. The FSCS will pay 100 per cent of the first £30,000 invested and 90 per cent of the next £20,000.

For long-term insurance products (for example, pensions and life assurance) compensation is unlimited. The FSCS will pay 100 per cent of the first £2,000, plus 90 per cent of the remainder of the claim.

If you lost your money because of, for example, unsuitable advice given by a firm, or theft, you will also probably have lost the opportunity to receive interest or some other return on that money. To reflect this loss, as part of the compensation it pays, FSCS adds a rate of return to the money you lost. This is calculated by reference to the interest you may have received if your money had been in a risk-free alternative, such as a bank or building society account.

The FSCS rate of return is one month sterling Libor (London interbank operating rate) minus 2 per cent, minus income tax. Libor is a 'standard' rate that is widely used and easily verifiable. This rate is reduced by 2 per cent to reflect the interest rate that an 'average' savings account might pay. FSCS takes off income tax because most consumers pay income tax on savings accounts."

For further information visit www.fscs.org.uk or tel: 020 7892 7300.

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