What with the collapse of numerous banks more than a decade ago, unfair hidden charges, past mis-selling of payment protection insurance (PPI) and personal pensions, and historically low interest rates, you could be forgiven for thinking that the safest place to stash your cash is under your mattress. But nothing could be further from the truth.
Thanks to the Financial Services Compensation Scheme (FSCS) – which protects savings, insurance and investments as well home finance – you can rest assured that if your dealings with a financial institution go horribly wrong, you’ll get your money back. Since it launched in 2001, the FSCS has helped more than 4.5 million people by paying more than £26bn in compensation, says FSCS public relations manager Suzette Browne.
“There’s a lower level of awareness that the FSCS covers insurance, investments and mortgage advice,” she says, “but most people know that up to £85,000 of cash in accounts with an authorised bank, building society or credit union is protected, if they were to go bust, by the FSCS.”
A savings account is also a safe home for your money because, unlike investments linked to the stock market, your savings don’t go up and down in value. However, because of inflation, the value can fall in real terms.
The downside of keeping your money safe and easily accessible is the low interest rates paid on most savings accounts, but at least it’s better than the zero percent paid by a mattress. However, according to data from Moneyfacts, the value of savings deposited in cash has fallen by up to 4% in real terms over the past two years. By contrast, money invested in an individual savings account (Isa) tracking the FTSE All-Share index has seen a real return of 9% over the same period.
So should you shed the safety of a savings account for riskier, if potentially more rewarding, investment in stock-market based products? As a general rule, if you will need to get at your cash within five years, you are better off sticking with a savings account. But if you’re in it for the long haul, then a product linked to the stock market – such as stocks and shares Isas (which includes Lifetime Isas for people aged 18 to 39) and personal pensions – makes sense. Investing in an Isa makes particular sense because income from and gains made on investments held in an Isa are tax free, and you can currently invest up to a maximum of £20,000 each tax year. You can share the £20,000 limit over different types of Isa so, for example, you can put £5,000 in a cash Isa and £15,000 into a stocks and shares Isa.
With a Lifetime Isa, the most you can invest is £4,000 each year (which counts as part of your overall £20,000 Isa limit) but on the plus side, the government will add a 25% bonus to your savings. On the downside, you can get access to your cash only if you want it for a deposit on a property costing a maximum of £450,000, or when you are 60 (or diagnosed with a terminal illness). If you can’t wait until then to get access to your cash, a pension would be a better home for your long-term savings, because you can withdraw funds from age 55. Paying into a pension also has an added bonus in the form of tax relief on pension contributions.
Another big plus in choosing a pension is that, according to FSCS chief executive Mark Neale, “pensions are a safe, reliable investment to provide income for retirement”.
Research carried out for the FSCS found that of those surveyed who have a pension, fewer than one in 20 were aware that the FSCS protects 100% of a pension directly managed under a life insurance contract, which includes personal pensions and stakeholder pensions. “Most pension products are fully protected by the FSCS, so it is concerning that so few know about this,” Neale says.
Other investments – including investment Isas – also benefit from FSCS protection. Compensation for investment Isas has a limit of £50,000 per person per firm, although this is due to go up to £85,000 from April 2019, matching the compensation limits for cash Isas now.
What many people may not realise is that the FSCS can also step in if you are set to lose money as a result of a firm selling insurance or annuities going bust or – with general insurance and mortgage advice and arrangement – giving misleading advice that causes you to lose money. However, as with debt management companies, along with firms selling cash accounts, pensions and investments, the FSCS can only help if a firm is authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) – you can check at register.fca.org.uk.
Three rules of investing
There are three things you should remember when you’re looking to invest or save your money:
1) Check your provider and/or fund is FSCS protected.
2) Check your investment opportunity – is it possibly too good to be true?
3) Know your FSCS limits – just in case the company fails – at fscs.org.uk/what-we-cover
For more information about how FSCS protects your money, visit www.fscs.org.uk
