The impending cut to the Financial Services Compensation Scheme's (FSCS) deposit protection threshold is set to be a headache for savers who have put money into fixed-term accounts. At the moment, if your bank was to go under, the FSCS would compensate you for any losses up to a limit of £85,000 per person per bank.
But the recent surge in the pound against the euro means that the UK limit will be cut to £75,000 with effect from 1 January 2016, to comply with a European Union directive fixing compensation limits in each country at the equivalent of €100,000.
So investors with larger balances may want to move any cash in excess of the new limit to a different bank but this will be difficult or impossible for those holding money in a fixed-term savings account. These accounts provide a higher-than-average interest rate in return for you locking up your money for a certain amount of time.
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Most do not allow early withdrawals, except in the most extreme circumstances. Fixed-term cash Isas are obliged to allow early access but they usually still charge a penalty, in the form of lost interest.
A typical saver would not have thought about the risk of a FSCS limit cut, so the regulator is now considering whether they should be given a chance to withdraw money freely from fixed-term accounts before 31 December. A favourable decision would help some savers out of their current bind.
But this is a reminder that you need to understand what you're committing to with a fixed-term account. If you're looking for an account that offers a higher rate and retains some flexibility for early withdrawals, you could consider one of those listed below.
|Coventry Building Society Fixed Rate Isa
|31 May 2020
|Early closure allowed with loss of 120 days interest
|Halifax Fixed Saver
|Early closure allowed with loss of 90/270 days interest
|Paragon Bank 120 Day Notice Account
|Penalty-free withdrawals allowed with120 days notice
|Virgin Money Fixed Rate Cash E-Isa
|Withdrawals allowed with loss of 60/90/180 days interest
Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.
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