Banks set to cash in on cuts to the savings safety net

As protection on your nest egg is slashed to £75,000 ...

SAVERS may find themselves thrown out of high- paying, fixed-rate deals if they want to ensure every penny of their nest egg is protected from any future banking crisis.

Last week, the compensation limit for savings — the amount savers have protected with each bank should it go bust — was slashed from £85,000 to £75,000.

Savers have been given until January 1 to reduce the balances they have in accounts by £10,000 if they want to ensure all their cash is guaranteed safe.

But experts fear building societies and banks may be about to use this as a chance to dump customers out of higher-paying deals.

Normally, once you have signed up for a fixed rate, whether it’s in an Isa or a High Street account, you are not allowed to add or withdraw any further amounts from the account. Banks do, however, sometimes make special allowances when the Government changes the rules on accounts — as has happened with the reduction in the compensation limit.

Ideally, savers should be allowed to take out as much as they need to reduce their balances down to £75,000, and leave the remainder in the account they’ve got.

However, fears are growing that banks may ask them to withdraw all their cash and move it to a completely new account. For those who signed up for longer term deals, this will mean switching to a lower rate and losing hundreds of pounds in interest.

Anna Bowes, director at specialist savings advisers Savings Champion, says: ‘This is a massive blow to savers who have carefully split their cash to ensure maximum protection. They now face an administrative headache if they want to keep their money safe.’

The amount of savings guaranteed with a bank or building society is set by the Financial Services Compensation Scheme. But this limit is, in turn, guided by the scheme in force throughout the rest of Europe.

All savers in eurozone countries get €100,000 protected in the event of a bank going bust.

Because the UK is not part of the eurozone, the amount British savers are protected by is converted into pounds — and this calculation is done every five years.

In 2010, when the rate was last set, €100,000 was worth about £85,000.

Since then, though, the euro has plunged in value because of the crisis in countries such as Greece. While this is fantastic if you are a tourist, because you will get more euros for your pound, it is bad news for savers.

ToDAY, €100,000 is worth just £75,000 — so the compensation limit has been lowered. It means that from January 1, anyone who wants to ensure all their cash is safe in the event of a bank going bust needs to lower their holding to £75,000 (or £150,000 if it’s a joint account).

It will prove an administrative headache for customers, but an opportunity for the banks. Normally, if you take money out of a fixed-rate bond before term you must pay an interest rate penalty which can be as much as nine months’ interest.

Some easy-access accounts will drop your rate if you move money out, or if you exceed a certain number of withdrawals in a year.

And there is a further complication for Isa savers. Normally, you have to transfer all of your money out if you want to move it from one Isa to another, because partial transfers are not allowed.

The Prudential Regulatory Authority — the City watchdog — is consulting with banks and building societies so that they will allow customers to reduce their limits between August 1 and December 31 without penalty.

There is also hope that any funds customers remove will not count as a standard withdrawal.

However, while the banks may waive charges for taking money out of fixed deals, there is nothing to force them to allow you to move just a £10,000 chunk of your cash.

It is feared that anyone who wants to reduce their holdings will be told that they have to end the deal they are in early.

In August 2012, a five-year fixed rate bond paid 3.36 pc after tax ( 4.2 pc before). Someone with £85,000 in the account would earn £2,856 interest a year after tax.

If they had to move to a new fix for the remaining two years of their term, the best rate they could get now would be 1.8 pc (2.25 pc).

If they had to move £10,000 from the old deal, then they would lose £156 a year. If they had to move the whole amount, however, the loss would be about £ 1,326 a year, including having to move £10,000 to a different account.

To add to the confusion, major banks have yet to update their websites to tell savers of the change.

With Isas, you must ask your new provider to move your money for you. You cannot just switch it yourself because you could lose the valuable tax perks.

And there is another trap for unwitting savers. Some institutions share a banking licence with their subsidiaries. Where they do, you will have only one lot of £75,000 cover for everything you hold across all their brands, including current, savings and cash Isa accounts.

Watch out if you have accounts with Halifax, Bank of Scotland, BM Savings, Saga, AA Savings and Intelligent Finance, as they all share the same banking licence.

The same applies for Yorkshire, Chelsea, Norwich & Peterborough and Barnsley building societies.

Money in National Savings & Investments accounts continues to enjoy 100 pc Government backing.