Understanding the FSCS temporary high balance rule and its impact on personal injury settlements

Chances are you may already know what the Financial Services Compensation Scheme (FSCS) is, even if you haven’t heard that term before. The FSCS is the protection scheme in place which provides government backing for money in bank accounts, up to £85,000 per banking institution. The FSCS also offers this same amount of protection for investments and pensions if those companies were to fail, however it doesn’t protect against investment losses.

The FSCS is designed to provide security for savers in the event of a bank collapse, but for those with larger sums of money the limit has the potential to leave a substantial portion of funds unprotected.

This is especially important when it comes to personal injury settlements, where the funds are needed to provide vital support to those who have been impacted by illness or injury. In the long term, there are many options for these funds, including investments, trusts and bank accounts as appropriate, but it can take some time for some of these arrangements to be setup once the funds are received.

The good news is that there are some specific rules in the FSCS which provide additional security in this scenario, known as the temporary high balance rule, offering personal injury claimants with additional security and time to arrange their affairs.

Temporary high balances are funds held in your bank account that are much higher than the standard protection limit due to specific life events. These balances benefit from enhanced FSCS protection to ensure your financial security during critical times.

Qualifying life events for temporary high balance protection

The FSCS recognises key life events that can lead to temporary surges in your bank account. Some of the most common examples of these include:

• Proceeds from the sale of a property (main residence only)
• Redundancy or inheritance
• Divorce settlements or retirement-related lump sums

In these instances, and others covered under the temporary high balance rule, enhanced FSCS protection raises the compensation limit to an amount of £1 million.

While £1 million is a substantial increase over the standard £85,000 limit, it may still be insufficient for proceeds of personal injury settlements, which can routinely be significantly higher than this.

It’s for this reason that the temporary high balance rule protection amount is unlimited for balances related to personal injury, disability or incapacity claims.¹

If you’re in receipt of a lump sum as a result of one of these events, this provides you with some time to get your affairs in order, offering FSCS protection as a ‘stop-gap’ between the funds arriving in your account and the long-term plans being put into place.

Enhanced protection for temporary high balances is offered for a six-month period from the date the funds are credited to your account.

That might sound like a reasonably long time, but it can take some time to go through a full financial advice process and setup the right accounts and structures for the long term.

So, the temporary high balance rule means you have some time to think about your situation and set things up properly, but there are some best practices to consider during this six-month period.

Seek professional advice

There’s a lot to consider when it comes to planning how best to manage the proceeds of a settlement. From issues around tax to investment choices to managing the funds in line with means-tested benefits, there are many planning options but also many ways you can go wrong if you’re not careful.

It’s an area where taking advice from professionals is well worth considering. They can guide you through all of the complexities, and help you avoid mistakes that could take away precious funds designed to help you maximise your quality of life.

Don’t wait to start planning

As mentioned, it can take a while to set up new investment accounts or go through the financial planning process. Ideally, you’ll want to start speaking to financial advisors and researching your options before the settlement is even finalised.

But if the money has arrived and you haven’t yet started planning, now is the time to do it. It’s better to have everything done before the end of the six-month period, than run over and risk leaving your funds unprotected.

Think about your long-term goals

A comprehensive financial plan is only as good as your understanding of your long-term goals. The clearer picture you have of what you want your life to look like, the more tailored and specific your financial plan can be.

Personal injury trusts

This is an area that a financial planner will almost certainly discuss with you, but a personal injury trust might be one investment holding structure worth considering. There are numerous benefits of a trust, such as protection from means tested benefits, but there are also costs involved with running it and complex tax rules to navigate.

Again, this is an area where the right advice is crucial.

The FSCS temporary high balance provides some much-needed breathing space for personal injury claimants, offering unlimited protection for a period of six months. However, it’s not a long-term solution, and leaving your funds dormant can leave them vulnerable to a banking collapse (though the chances of this are slim).

The right advice is pivotal in maximising the long-term benefits of your settlement and ensuring you’re in the best position to improve your quality of life. At Evelyn Partners, our specialist personal injury and Court of Protection team can help you both secure your funds in the short term and set up the right structures and investments to build the future you want. Remember, investments carry risks and you may get back less than invested.

To speak to an Evelyn Partners financial planner, book a free initial consultation.

¹ FSCS Protection for temporary high balances