£85,000 FCS Protection & Compounding....

SavvySaver24

Hey,

I have a really silly question that I've hunted around and just can't find the answer on. 

We a few ISAs between me and my partner. Amounts in each vary between £20k to £75k and are funded by inheritance that we're slowly shifting from savings accounts into ISAs.

As I've started to get to grips with the magic of compounding I'm starting to wonder what happens as you edge over the £85k protection limit?

Should I start taking some of the money out and putting it into new ISAs? What I'm struggling to understand is over the long term (15 to 20 years) does having smaller amounts in multiple ISAs work out the same in regards to compounding as a large amount in just one? And if the one ISA with a larger amount ends up being worth more, is it worth the gamble of being over the FCS protection limit.

The above is in regards to CASH ISAs specifically. But we'll each be opening a Stocks & Shares ISA this year. While that will obviously take longer to reach the £85k (based on ISA yearly limits) I'm still thinking in the back of my head what happens there in regards to compounding. Again are multiple ISAs of £85K going to end up making the same through compounding as one larger ISA.

Sorry this is just one bit of maths and finance I can't get my head around!

masonic

FSCS protection covers the balance of your account plus any accrued interest. If this ends up being >£85k, then you have money at risk. Your total balance is that held in all accounts covered by the same banking licence, so to avoid exposure to default risk, you'd need to ensure this is kept below the limit. I don't know whether or not this addresses your questions or not.

Regarding compounding, the rate of return is relevant, so S&S ISAs would normally give rise to more compound returns due to the better returns on average. The FSCS protection for S&S ISAs is of much lesser importance than that of cash ISAs, because assets held in a S&S ISA are ring-fenced and not available to the provider, whereas cash in a cash ISA is used by the bank to finance its business.

Keep_pedalling

If this is long term savings then you have better options than cash ISAs. What is your current pension provision like?

MX5huggy

Splitting your money across multiple accounts doesn’t make any difference to compounding (if the rates are the same on each account). Personally I wouldn’t worry about going a bit over the £85k. 

dunstonh

If you are using mainstream unit linked funds (i.e. not going into weird or unusual investments that could go illiquid) then FSCS protection is not really important with investments.    The risks with investing are different to cash as you are not investing in your administrator.  

SavvySaver24

I already put 18 to 20% in my pension (between my employer and myself).

My plan for what I am currently saving (in CASH ISAs) and will be investing in (in S&S ISAs) is to cover the ages of 48/50 to 58 when I can access my pension. So these can be in these ISAs for 18 to 20 years.

My concern is, in ensuring I keep the balance of each ISA under £85k for FCS protection, I'll lose out on the impact of compounding as no one account will have a large sum? I'll be starting them all at £20k and stopping them when they reach £85k and always shifting the money into new accounts to start again? 

masonic

SavvySaver24 said:

My concern is, in ensuring I keep the balance of each ISA under £85k for FCS protection, I'll lose out on the impact of compounding as no one account will have a large sum? I'll be starting them all at £20k and stopping them when they reach £85k and always shifting the money into new accounts to start again? 

Well that concern is completely unfounded. If you held £100k in one account paying 5% or split it between two or three accounts paying 5%, the total compound growth would be identical. What may reduce your overall return is if you have to choose lower paying accounts in order to split. In reality, it is impossible to keep your money in the best account all of the time, so having various tranches allows you to take up opportunities at different times.

SavvySaver24

masonic said:

SavvySaver24 said:

My concern is, in ensuring I keep the balance of each ISA under £85k for FCS protection, I'll lose out on the impact of compounding as no one account will have a large sum? I'll be starting them all at £20k and stopping them when they reach £85k and always shifting the money into new accounts to start again? 

Well that concern is completely unfounded. If you held £100k in one account paying 5% or split it between two or three accounts paying 5%, the total compound growth would be identical. What may reduce your overall return is if you have to choose lower paying accounts in order to split. In reality, it is impossible to keep your money in the best account all of the time, so having various tranches allows you to take up opportunities at different times.

Thanks and this is the answer I needed really - this is where I really don't understand compounding because everything I read says it's about having it in one account to grow for as long as possible. But that won't happen if I'm constantly moving the portion over £85k to a new account.

Abertawe25

be aware that s/s isas also go DOWN AS WELL AS UP. NOT LIKE CASH ISAS.

gasman1976

It's not a silly question, but I think your misunderstanding is a common one where people talk about the "magic of compounding".

All compounding means is that you leave the interest in, & you get interest on the interest (& interest on the interests interest etc etc).
In your situation, you get close to the 85k limit, so you move some of that sum over to a new account (including the interest) You've still left the interest in the account, albeit a new one, so you'll get the compounding effect on the total pot (with the provisos as above that you may have differing levels of interest on the multiple accounts)