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New year, new reduced deposit protection

Savers now have a new level of Financial Services Compensation Scheme protection that is £10,000 lower.

Three out of four savers may be unaware that the protection provided for savings by the Financial Services Compensation Scheme (FSCS) fell by £10,000 to £75,000 on 1 January 2016. The previous £85,000 limit was in place for almost five years.

The FSCS, launched in 2001, guarantees the safety of savings kept in banks and building societies up to a limit of €100,000, to match the guarantee offered in the EU. The UK limit has fallen following the decline in the value of the euro relative to the pound.

Research by peer-to-peer lender RateSetter shows that the public awareness of the level of protection provided by the FSCS is declining and many people overestimate its ability to protect them. Only a quarter of people (27 per cent) correctly identified the current level of FSCS protection when it conducted research in August 2015.

FSCS chief executive Mark Neale said that the new limit will protect some 97 per cent of people, compared with 98 per cent under the old limit, with about 93 per cent of consumers having £50,000 or less in savings.

Rhydian Lewis, CEO at RateSetter said: "Anyone fortunate enough to have more than that amount with any one provider will need to ensure that their money is properly allocated.

"Savers can increase their protection by splitting their money between different banks and building societies. However, some investors with more than £75,000 in savings have told us that the reduction could prompt them to look elsewhere for a better rate - we've certainly seen increasing levels of investment on our platform since the change was announced."

Money invested through RateSetter is not covered by the FSCS, but is protected by a £16.5m Provision Fund.

Firms which are eligible under the FSCS will have an authorisation number or a Firm Reference Number (FRN). If the firm is EEA-authorised, you may have to claim compensation from another country. The FSCS will pay compensation when an eligible firm is in default and cannot pay claims against it.

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. You can check if your providers share a banking authorisation number at www.fscs.org.uk/protected. The FSCS also offers 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.

The reduced deposit protection poses 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.

However, I urge you to make sure that your hard-earned savings deposits are within the new lower compensation limits. 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.

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.