There have been various horror stories about investments failing and people losing everything. What are my rights if this happens and is it worth having my money with lots of different companies to maximise FSCS cover?

Jane, via email

Tom Selby – AJ Bell senior analyst

This is a common question and it’s worth spending a bit of time understanding how the Financial Services Compensation Scheme (FSCS) works before answering.

The FSCS exists to ensure savers and investors are protected should their provider go bust. There are different levels of protection in place depending on how you invest your money.

Cash in a bank or building society, for example, is covered up to £85,000, while those drawing a lifetime income in retirement via an annuity enjoy 100% protection.

You can read about all the different compensation limits here.

When it comes to investing – whether that’s through an ISA, SIPP or general investment account – the compensation cap is £50,000.

This means if you save any more than this amount with a single FCA-regulated investment manager and it goes bust, you may lose some or all of the excess. It’s important to note that the FSCS only covers regulated investments, so if you put your money in a direct stock and the company goes bust, or an unregulated investment such as peer-to-peer, you might get nothing back.

It is therefore sensible to check your investments are covered by the FSCS before handing over your money.

If the platform you are using to invest goes bust this shouldn’t result in you losing money. This is because a platform doesn’t usually hold your money directly – instead it provides a low-cost route for you to invest in things like stocks, funds and bonds. It is these end investments where the FSCS protection kicks in (provided they are eligible), which is one of the reasons doing due diligence is so important.

However, where your platform goes bust and there are problems finding your end investments the costs of doing this could potentially come from your funds. This is unlikely to be the case when you’re investing in regulated funds, but it’s still worth checking the financial stability of your provider, including how much cash they hold in reserve.

Maximising your FSCS protection is one reason why it is sensible to spread your investments around a few different providers. It also makes sense to do the same with things like cash deposits, although make sure the providers are different entities as some banks have different brands which will fall under the same FSCS compensation umbrella.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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