The government has decided to give the savers among us a boost by pushing through an increase in guarantees for bank deposits up to £50,000.

This is partly due to anxiety that the UK banking system is losing out to blanket guarantees of savings in Ireland, the Financial Services Authority (FSA) made it clear the government was preparing legalisation to "further enhance consumer confidence in the banking sector".

Hector Sants, chief executive of the FSA, said the increase in savings guarantees would take place from Tuesday, October 7.

The FSA will also decide on whether the limit should be raised even higher especially as last night Germany announced it was following the lead of Ireland and Greece and offering a blanket guarantee on all savings. Late last night Denmark also followed suit and the treasury may now need to take more radical steps to avoid many of us investing our savings elsewhere.

Below we try and explain the current situation.

• What’s changed?

Currently, if you have a current or savings account in a UK-based institution, up to £35,000 of your cash is protected through the Financial Services Compensation Scheme (FSCS). This will be increased to £50,000 with effect from October 7.

If your institution collapses,  you will be entitled to claim back 100% of your money up to that limit. You are covered for that sum in each organisation you bank with; unless any of them share a banking licence. If, for example, you have money with Barclays and HSBC, which don't share a licence, you will have up to £50,000 protected in each bank.

However, if you have money with HSBC and First Direct, which do share a licence, only the first £50,000 of your total will be protected.

Are your savings institutions part of the same banking group? Find out here.

The protection is for each account holder, so in a joint account up to £100,000 will be covered.

• What if I have more than £50,000 in an account?

The first £50,000 will be 100% secure and you will be able to reclaim it in the same way as someone who holds less than the new limit. You may be able to recover some of your other money, but only after the bank has been liquidated. The FSA is looking at how this process can be made easier.

• How do I get my money back if my bank does fail?

If a bank or building society falls into difficulty the FSCS will act.  It will get a list of customers from the administrators and if you are on it you will be sent a form to apply for compensation. You must fill this in and send it back to get your claim processed.

• How long will that take?

The FSCS says that so far it has settled 96% of claims from depositors within two weeks, but these have related to credit union failures so there have been far fewer savers involved than if a major bank were to fail. A spokeswoman for the FSCS admits this is "uncharted waters" and is unable to say how long claims would take to turn round.

• How many of us will benefit from the increased limit?

If you are approaching the old limit of £35,000 or already hold between £35,000 and £50,000 in a single savings account, you stand to benefit from the change; it means you will not have to transfer your money elsewhere to get 100% protection.

According to a Treasury consultation document, last summer 95% of building society accounts and 96% of bank accounts held deposits of £35,000 or less, while 97% and 98% respectively held deposits of £50,000 or less.

If those figures are unchanged, around 3.5 million accounts which were not completely protected under the old limit are now 100% guaranteed which equates to nearly 40% of all the money held in UK savings accounts.

• How does this fit with the Irish savings guarantee?

UK savers with Ireland's six biggest banks, including those with Post Office savings accounts, do not have to worry about the protection limits that apply to banks and building societies in this country. You will have 100% of your deposits protected under the guarantee announced earlier this week by the Irish government.

• What if my mortgage and savings are with the same bank?

Your deposits are offset against your outstanding borrowing and you only get back anything that is left after this has been done. So if you hold £30,000 in a savings account and have an outstanding mortgage of £200,000 when your bank fails, instead of getting any money back you would see your mortgage debt reduced to £270,000. The FSA is consulting on whether your mortgage and savings should be dealt with separately, but in the meantime you might want to move your savings to another provider.

• What else is changing?

Nothing right now but the FSA is looking at ways to improve the scheme and to make payouts quicker. Currently, if you have a large amount of money in an account on a temporary basis (say, from a house sale) you only have £50,000 covered.

• Unlimited guarantees?

Because of the move by Ireland and other European countries, its no surprise that 40% of savers here in the UK want unlimited guarantees for our money says money website Fool.co.uk. The raising of the UK compensation scheme to £50,000 may not be enough.

41% of us would switch to an Irish bank and further evidence that many of us are preparing to switch can be seen from the number of new Irish bank accounts opened through the Fool.co.uk savings centre. Out of 19 savings accounts offered on the website, Anglo Irish Bank accounted for 41% new accounts opened.

The threatened flow of money into Irish banks suggests that the raising of the UK compensation scheme may not convince many of us. The current scheme is unnecessarily complicated as it restricts compensation to a banking license. So, different brands under one license are only covered once.

David Kuo, Head of Personal Finance at Fool.co.uk, says:

“The decision by the Irish Government to give its domestic banks complete backing is the least that any government should do to assure savers. The UK Government should follow suit.

“Interestingly, Anglo Irish Bank is not even a top interest payer. So, it seems that savers appreciate the relationship between risk and reward, and top rates may indicate where your money may be most at risk.

“In today’s troubled markets, savers are not too bothered about full returns on their savings but that their savings are returned in full when they want.”

Some information © www.fool.co.uk 2008

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