In these times of financial stress, how well protected are your investments?

Posted on 16/09/2008. Filed under: UK investor compensation |

Given the current turmoil in the world markets with banks going bust and insurance companies needing emergency loans to keep afloat you could be forgiven for worrying about the security of your money. However, all is not lost.

In the UK when an insurance company, bank or broker goes bust there is an organisation called the Financial Services Compensation Scheme (FSCS) which provides compensation to investors and policyholders who have lost out. The FSCS is funded by levies on the companies authorised to trade in the market place. The levels of compensation that it can pay depend on the type of arrangement that you hold and have been set out below:

Deposits: £35,000 per person (for claims against firms declared in default from 1 October 2007). 100% of the first £35,000.*

Investments: £48,000 per person.
100% of the first £30,000 and 90% of the next £20,000.

Mortgage advice and arranging: £48,000 per person (for business conducted on or after 31 October 2004).
100% of the first £30,000 and 90% of the next £20,000.

Long-term insurance (e.g. pensions and life assurance): unlimited.
100% of the first £2,000 plus 90% of the remainder of the claim.

General insurance: unlimited.
Compulsory insurance (e.g. third party motor): 100% of the claim. Non-compulsory insurance (e.g. home and general): 100% of the first £2,000 plus 90% of the remainder of the claim.

General insurance advice and arranging: unlimited (for business conducted on or after 14 January 2005). 100% of the first £2,000 plus 90% of the remainder of the claim. Compulsory insurance is protected in full.

In summary, if hold cash with a bank or building society the maximum compensation amount is now £35,000 per customer at each bank. The maximum compensation for insurance policies is effectively 90% of the value of the claim (100% of the first £2000). Whilst insurance companies provide a greater degree of investor protection this relates to the surrender or claim value NOT what you paid for it. If your policy is invested in the markets it will certainky have reduced in value. If it is held in back deposits and the underlying banks go bust – you loose your money. The above levels of compensation relate to individual investors and policyholders – not institutions.

Whether you are worried about the solvency of the insitutions with which you hold money or about the effect of the markets on your investments you should not act in haste as this could trigger penalties or merely crytalise investment losses. Seek professional advice from an independent financial adviser who can provide you with impartial professional advice.

If you would like further information on the FSCS click here


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Update: The limit for deposist has been increaed to £50,000.

Be careful though of dividing your funds up that they genuinely are with different institutions. If you pick banks trading under different names but with the same banking licence you will only be protected to the extent of the 1st £50,000.

Of course, in these times with very low interest rates it is tempting to go for arrangements that purport to defy gravity and provide far higher returns than the rest of the market with no additional risk. Best thing to do is run a mile; or at least very carefully before proceeding. Remember not to put all of your eggs in one basket.

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