The amount of savings protected by the Financial Services Compensation Scheme (FSCS) is to be reduced.
Currently, the first £85,000 of savings with any participating institution are covered. However, this is to fall to £75,000 from 1st January 2016.
What is the FSCS?
The Financial Services Compensation Scheme is a compensation fund which protects you in the event of the financial firm you're with going bust.
It's authorised by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority.
The scheme covers deposits, insurance policies, insurance broking, investment business and home finance.
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How the limit is set
The Prudential Regulation Authority is required by the European Deposit Guarantee Schemes Directive to recalculate the FSCS deposit protection limit every five years, setting it to the equivalent of €100,000. Back in 2010, €100,000 was worth £85,000. However, the contrasting fortunes of the pound and the euro have seen that figure drop by £10,000 since then.
The new limit has been put in place today, but HM Treasury has introduced legislation to keep it at £85,000 until the end of December so that depositors have time to plan ahead.
For those who were previously protected and are tied into products with balances above £75,000, the PRA is consulting on ways to manage the impact of the limit change.
The intention is to let depositors withdraw funds between the old and new limits penalty-free from 1st August 2015 until 31st December 2015 if they have a decrease in deposit protection as a result of the change. The consultation ends on 24th July.
Most people have £50,000 or less in savings so 95% of savers will still be protected by the new limit anyway, according to the FSCS.