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Deposit compensation to fall to £75,000

I was one of 230,000 Icesave customers who faced losing out in the October 2008 collapse of Landsbanki and were fortunate to receive a bailout from the FSCS. It's an experience that I wouldn't wish on anyone and I urge you to make sure that your hard-earned savings deposits are within the new lower compensation limits.

The move does pose an administrative headache for savers who have carefully split their cash between institutions to ensure maximum protection. It could also leave you out of pocket if in finding a new home for the excess money you receive a lower rate of interest.

Mark Neale, chief executive of the FSCS, says: "Until 31 December 2015 people are protected up to £85,000. People have six months to get ready for the change, if necessary."

 

Why is depositor protection reducing?

The move aims to harmonise limits across Europe at 100,000 euros or equivalent. The UK limit has reduced because of the relative weakness of the euro to sterling compared with five years ago when the limit last changed. The level will not be reviewed again for another five years.

Savings experts say the move is "absurd" and "bonkers". Andrew Tyrie, the chairman of the Treasury Select Committee, said: "It is absurd that the 16 per cent depreciation of the euro largely brought about by the crisis in the eurozone in general, and the Greek crisis in particular, should be forcing a reduction in the level of protection available to UK depositors. It makes no sense to fix deposit guaranteed to a volatile variable like the exchange rate."

FSCS says the new reduced limit will cover 95 per cent of savings in the UK and points out it has a new temporary protection for high balances, which means some deposits, such as from a house sale, will be protected up to £1m for a rolling six-month period.

 

What should you do?

The FSCS depositor protection is per person, per institution. Savers that have accounts split between institutions that are part of the same banking group will have to make sure that the total doesn't add up to more than £75,000.

Although you have six months to prepare, you need to start planning a transfer as soon as possible. Potential new homes for the excess £10,000 include NS&I products. The bank is fully backed by the UK government and therefore the safest bet for UK savers but doesn't pay the best rates. For example, its Direct Saver pays 1.1 per cent AER and its Direct Isa pays 1.5 per cent.

You could put up to £50,000 into NS&I Premium Bonds for the chance of winning monthly tax-free prizes worth up to £1m. The rate used to calculate the prize fund is 1.35 per cent but the risk here is that you may not win any prizes at all.

Moneyfacts also points out that current accounts are becoming a salvation for savers, although this won't necessarily take up all the slack. Rachel Springall, Finance Expert at Moneyfacts.co.uk, says: "In the past, current accounts paid less favourable rates of credit interest than standard savings accounts, but today, things couldn't be more different.

"Savers can earn over three times more interest using a current account compared with the best easy access account on the market. For this reason, it wouldn't be surprising if savers flock to these accounts and abandon standard savings accounts altogether.

"A balance of £2,000 could earn savers £97.80 in interest per year with TSB's Classic Plus account, while a balance of £20,000 with Santander could see them pocket £592."

Alternatively, consider peer-to-peer lenders such as Ratesetter. These are not covered by the FSCS at all. However, they offer decent rates for your money by lending it to peers. Ratesetter has gone further than some of its rival P2P lenders by putting in place a Provision Fund designed to reduce investors' risk by spreading it across the whole loan portfolio. All borrowers pay into the Provision fund, which repays investors in the event that a borrower misses a payment or the loan cannot be repaid on schedule for any reason.

Online savings platform Flagstone Investment Management has launched a 12-month diversified deposit account which pays 1.73 per cent and provides FSCS protection up to £255,000 or £225,000 once the new limits take effect after 31 December 2015. It gets this higher protection limit by spreading money between three different banking institutions: Arbuthnot Latham, Julian Hodge and BLME. All client funds are held in segregated trust accounts and users will not have to complete new documentation every time they want to move their money between banks, allowing them to move quickly from one account to another.

There is an initial subscription fee of 0.2 per cent for the service. For further information visit: www.flagstoneim.com