Are you covered by the FSA safety net?

published 18 July 2008

After the Northern Rock debacle, most people are aware of the Financial Services Compensation Scheme (FSCS, Fscs.org.uk), which guarantees £35,000 of your cash savings should a bank go bust. It also covers losses on other investments caused by an FSA-authorised firm, such as a broker, going bust.

The protection extends to shares, bonds, exchange-traded funds and derivatives. Compensation is limited to a maximum of £48,000 per person per insolvent firm. Unit trusts and defined contribution, or "money purchase", personal pensions also qualify for compensation but as funds invested on your behalf are usually owned by a separate trustee, your investments are ring-fenced from creditors in the event of insolvency, says Pensionadvisoryservice.org.uk, so a claim against the FSCS shouldn't arise.

For those who have already retired and bought an annuity from an FSA-authorised insurance company, the FSCS protects 90% of it should that firm go under. The 90% rule also extends to pre-retirement funds built up under a defined benefit or "final salary" deal with an authorised insurance firm. However, if the fund is managed by a company (say your employer) instead, then claims should be made to the Pension Protection Fund. This pays 90% compensation for those who have not yet reached pension age (subject to a cap of £27,771 a year) and 100% to those who have already reached normal retirement age or retired early through ill-health.