FSCS protection to decrease to £75,000

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At present anyone whose bank, building society, or credit union goes bust is covered for savings of up to £85,000.

The FSCS comes under a European directive, which has a top limit of 100,000 euro. With sterling doing so well against the euro, the Bank of England had to reduce the British guarantee to match the rest of the EU.

The lower limit would have been applied immediately, but the Government has brought in legislation to keep £85,000 guarantee in place until the end of 2015.

Why is it changing?

The Deposit Guarantee Scheme promises to provide compensation for each customer with deposits up to the set limit should their bank, building society or credit union fail.

It was introduced after the banking crisis in 2008, with an upper limit of 100,000 euro set to prevent people being tempted to move their money across borders to secure a higher level of protection.

But because the UK isn't part of the euro, the Bank of England must revisit and set the limit every five years to keep our guarantee in line with that in the rest of Europe.

Following the effect of the turmoil in Greece on the euro, the pound is trading just three euro cents short of its record high against the single currency.

That's great news for holiday makers, but on the flip side it means the amount of money we're guaranteed to be refunded is now £10,000 less than it was.

But even with the reduction, the FSCS say more than 95% of savers will still be completely covered, as the vast majority of us have less than £50,000 in savings.

Time to move

People who have savings of more than £75,000 now have six months to move the extra to another account with another protected company.

That should also give banks and building societies plenty of time to get their staff up to speed on the changes and help avoid the kind of situation we reported on here.

Many larger deposits are in accounts with fixed terms, or that have strict rules about how the money held can be accessed.

So the Prudential Regulation Authority (PRA) have said they'll work with financial providers to ensure that anyone affected by the change can withdraw enough money to bring them back under the limit without facing charges, penalty fees or losing interest.

But the PRA say the rules will only allow for one such transaction from each protected organisation, effectively limiting people to making simple transfers of funds from one institution to another.

At the same time as the reduction was announced, other changes to the FSCS have come into effect.

Previously only personal account holders and small businesses could benefit from the guarantee, but now larger businesses and small local authorities will also be covered - for up to £75,000.

More importantly for individuals, though, is the introduction of protection for up to £1 million for certain types of temporary deposit, such as the proceeds from the sale of a house.

Still better than before

But it's a far cry from the situation prior to the introduction of the scheme.

In 2007 there was a tiered system of protection in place which only guaranteed 100% of the first £2,000 of a deposit, and 90% of the next £33,000.

That meant that no matter how much someone had saved in a company covered by the FSCS, the maximum they would get back should it go under was £31,700.

But when Northern Rock almost collapsed that year, the Labour Government stepped in to guarantee 100% of people's savings up to £35,000.

As already mentioned, the banking crisis in 2008 brought about the introduction of the European deposit guarantee scheme directive.

Between the agreement and the full introduction of the scheme, member states were asked to increase the protection they offered to at least 50,000 euro - so the UK raised the FSCS protection to £50,000.

Under the directive all member states had to increase the level of protection they offered to 100,000 euro by the end of 2010 - which gave the UK its £85,000 limit.

It's unlikely we'll ever need that kind of protection, but as the ads say, it's good to know it's there.