FSCS: Slashed safety net is a headache for fixed-term savers

The deposit threshold cut to the Financial Services Compensation Scheme will come as a headache to fixed-term savers. Sarah Moore outlines the options.

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.

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Coventry Building Society Fixed Rate Isa31 May 20202.4%Early closure allowed with loss of 120 days interest
Halifax Fixed SaverOne/three years1.4%/2.1%Early closure allowed with loss of 90/270 days interest
Paragon Bank 120 Day Notice AccountNone1.96% (variable)Penalty-free withdrawals allowed with120 days notice
Virgin Money Fixed Rate Cash E-IsaOne/two/fiveyears1.71%/2%/2.51%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.