The UK Financial Services Compensation Scheme (FSCS) covers up to £75000 per person per bank entity.
If one owes the same bank money in the form of a debt or a mortgage, would this affect the limit?
For example, if one was lucky enough to have £95000 (if only!) in the savings account, but owed the bank £15000, would one then end up with £75000 net (losing £5000) if the bank went under?
I could not see such a case on their details page here.
Subtracting the loan from a deposit is known as "setting-off", and in general whether you can do it would depend on the terms of your contract with the bank. It's quite likely that they wouldn't state it either way and at best you might end up with a legal fight. So I'd recommend assuming that it won't be possible.
According the FSCS:
If the bank fails FSCS would refund the maximum under our rules (currently £75,000 per person). Any credit balance over and above this would be offset against the mortgage by the insolvency practitioner responsible for the winding up of the bank. FSCS would play no part in that process.
(Unless the savings were larger than the debts, but then it wouldn't make sense to have them in a zero interest offset account!) So the money would not be completely lost as such.
Whether that would count as an overpayment is an open question, but perhaps a moot point anyway if the bank went under.
(Finally, arguably, a pension or other investment might also be better for such amounts.)
