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Savings protection could rise to 50,000

The Government has announced plans to increase the guarantee on depositors' savings to 50,000 if their bank collapses but said lenders will not have to pay billions of pounds upfront into a protection scheme.

Following the Northern Rock furore, 100% of the first 2,000 of deposits, then 90% of the next 33,000 were protected.

On 1st October of this year, that was extended to all of the first 35,000 per bank per customer.

Now the plan is to raise the threshold so each saver's first 50,000 per bank is fully protected.

As at present this would count for a net deposit, so if you had 50,000 deposited but also had a 20,000 loan with the same bank, then only 30,000 would be compensated.

Under both the current and the proposed rules, a couple with a joint account would be covered per person.

The rules regarding having money in different accounts, with the same bank are a little more complicated.

For instance if you have two accounts with HSBC with 35,000 in each, then only the first 35,000 will be covered at present.

More significantly some banks have different divisions but are authorised under one name. So if, for example, you have 35,000 with the Halifax and 35,000 with the Bank of Scotland, then you are only covered for the first 35,000.

Other banking groups, however, have various divisions separately authorised. For example, a customer who has 35,000 with The Royal Bank of Scotland and 35,000 with NatWest will have all of the money protected, even though they are part of the same group.

UK banks had been worried that, with their finances already under pressure, they would be asked to pre-fund the system.

The Government, rather than the banking system, will be underwriting a higher level of protection for consumers which will be set out in a consultation on banking reforms.

Any changes will come into effect in the autumn or early in 2009.

About 99% of savers in the UK have less than 35,000 in the bank and half the adult population has savings of 500.