You're protected under the FSCS- a quick google gives this, which at a glance looks accurate
A.The FSCS doesn’t keep a pot of cash sitting ready and waiting. Instead, it has the power to operate a 'compulsory levy' on banks, insurers and others signed up to the scheme, as and when it needs the money. The advantage of this is it can pull cash from more than just the affected sector (i.e. if an insurer went down, while other insurers must contribute first, above a set level banks would be asked too) so funds should be available.
In theory, this means should the worst happen and a bank goes out of business, the FSCS has the legal power to call in funds from major financial institutions to cover the compensation needed to repay the first £35,000 lost by every saver
However, here it gets a little complicated. The FSCS has a cap on how much cash it can levy per year from financial institutions; from 1 April 2008 the overall capacity was set at just over £4 billion. Yet in the FSA’s review document (page 77), it admits that £4 billion wouldn’t even cover the twenty-fifth biggest UK deposit taker!
That means there’s not enough money in it for all the main high street names. This is a tad worrying to say the least, although of course the Government’s main focus is to avoid ever getting into a situation where the FSCS would need to pay out.
Yet it was something I wanted to deal with, so in May 08, as part of my ‘How Safe are your Savings’ programme I managed to get an interview with the Cabinet Minister responsible, Chief Secretary to the Treasury Yvette Cooper, MP. During the interview, as I pushed, I was told the government would ensure the £35,000 was paid out, yet I couldn’t get an answer on how… then just before the programme went out we got this statement
The Treasury gave us the following statement
"In the unlikely event a major bank became insolvent the Government would ensure that the FSCS has access to enough immediate funding to pay out depositors in a timely manner, through borrowing from the Government or Bank of England. The FSCS could then levy up to £4 billion per year from the financial services industry to cover the costs of compensation"
In plain English, this means that in the unlikely event of a bank collapsing and requiring more than £4 billion of compensation, the FSCS would be lent the money to compensate consumers up to £35,000 each, and it would have to pay back to loan in subsequent years, by continuing levies.
So this means, the £35,000 limit is still the prime safety limit to rely on in your planning."
Oh, for JBuk, this is why I didn't want to go into the bank vs institution thing!
"This isn't about separate banks, its about separate institutions.
Sadly, it's a bit more complex than it first appears. The technical definition is that you get the FSCS protection for each company independently registered with the Financial Services Authority (FSA). Over the years, many banks have merged or been taken over, blurring the lines over what actually constitutes a financial institution.
This means, bizarrely, that you only get one lot of £35,000 for the whole of HBOS, which is the combination of the Halifax, Bank of Scotland, Birmingham Midshires and others. Yet if you had money in the Royal Bank of Scotland, NatWest and Tesco, which are all part of the giant RBS banking conglomerate, you would be separately protected in each of them."
The other £5000, stick in an isa in a different bank or similiar. Even before the northern rock collapse, your first £2000 was guaranteed and the next £33000 was guaranteed to 90%, which helps highlight the madness of the panic withdrawals...