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Temporary savings deposits may get more protection

Savers who deposit large sums into their accounts could get a short-term increase in the level of protection guaranteed their money should the bank or building society get into difficulty.

Proposals for extra, short-term protection covering amounts up to £500,000, lodged in an account for a limited period of time while the saver decides where to invest it or while they wait for a house purchase to go through, have come from the Financial Services Authority (FSA).

At the moment, the Financial Services Compensation Scheme (FSCS) covers the first £50,000 that savers have deposited in a bank or building society.

But now the FSA is considering the introduction of temporary cover for particularly large sums.

The protection rules only cover each savings provider, so people who have had a windfall have been advised to spread their money around several banks and building societies in order to take advantage of the cover.

Changing the rules would enable people who have come into an inheritance, or have recently sold a house, or have received a significant redundancy payment or have drawn a pension lump sum to keep all the money in a single deposit as they weigh up the options for the longer term.

The temporary higher level of protection would last for six months.

Those who receive settlements for personal injury claims would get extra cover for up to 18 months.

Thomas Huertas, a director at the FSA, said: “Our proposals will protect people who have little or no choice about holding a high balance for a limited period over the current FSCS limit of £50,000 before they can diversify it, if they wish, between different institutions.

“However, the FSCS is not intended to protect consumers who keep high account balances for a long period, so the extra protection will be time limited. This change would contribute to the banking reform objective of providing effective compensation arrangements in which consumers have confidence.”