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.
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.
| Account | Maturity | Interest rate | Early withdrawals |
|---|---|---|---|
| Coventry Building Society Fixed Rate Isa | 31 May 2020 | 2.4% | Early closure allowed with loss of 120 days interest |
| Halifax Fixed Saver | One/three years | 1.4%/2.1% | Early closure allowed with loss of 90/270 days interest |
| Paragon Bank 120 Day Notice Account | None | 1.96% (variable) | Penalty-free withdrawals allowed with 120 days notice |
| Virgin Money Fixed Rate Cash E-Isa | One/two/five years |
1.71%/2%/2.51% | Withdrawals allowed with loss of 60/90/ 180 days interest |