Bank and building society customers are to get £10,000 less compensation if their financial institution goes bust, the Bank of England has announced.
Currently, people’s deposits are protected by up to £85,000 if their bank, building society or credit union goes bust under the Financial Services Compensation Scheme (FSCS).
But the Bank now says that this level of protection will be only maintained until December 31 - and from January 1 it will fall to £75,000.
The change, which is a requirement of a European directive, was described by commentators as “bonkers” and “absurd” and another blow for savers, who have suffered years of poor returns on their cash in the low interest rate environment.
The FSCS deposit protection limit is set under the European deposit guarantee schemes directive and is recalculated every five years. It is set at a sterling amount equivalent to 100,000 euro.
The current compensation limit was set in December 2010, based on the sterling equivalent of 100,000 euro at the time.
The pound has strengthened against the euro recently as the crisis in Greece has unfolded.
Danny Cox, chartered financial planner, Hargreaves Lansdown, said: “This is absolutely bonkers. Savers are already suffering rock bottom interest rates, and now to add insult to injury the safety of that cash is being undermined.
“The popularity of both NS&I pensioner bonds and premium bonds demonstrates savers care as much about safety as they do about rates. Savers need to have the comfort of knowing they are protected in the event of a bank or building society collapse.”
Andrew Tyrie, chairman of the Treasury Committee, said it is “absurd” that the depreciation of the euro should be forcing a reduction in the level of protection for UK deposit holders.
He said: “Many savers and small businesses arrange their finances on the reasonable assumption that the deposit cover will be stable.
“They might also reasonably have expected that any changes would be in an upward direction, to reflect inflation and growth. Many people will now have to re-examine the arrangements they have in place.”
The new £75,000 limit has been set today - but the Treasury has put legislation in place to maintain the existing £85,000 limit until December 31, to give people and small firms time to adjust. When the new limit starts on January 1 it will again remain in place for five years.
Consumer group Which? also raised concerns that some people may unwittingly leave thousands of pounds at risk - and urged banks make sure their staff are properly trained to tell their customers about the new limit.
Which? executive director, Richard Lloyd, said: “A reduction in the compensation scheme limit means people could unwittingly leave thousands of pounds at risk if they’re not made aware of the new rules.”