The deposit protection limit, which is put into place through the Financial Services Compensation Scheme (FSCS), is currently £85,000 – a figure which has been in place since 2017.
It meant that, should a bank fail, the customers would be reimbursed up to a maximum of £85,000.
When the new limit is introduced on 1 December, banking customers will benefit from a £120,000 maximum reimbursement.
Sam Woods, deputy governor for Prudential Regulation at the Bank of England and CEO of the PRA, said: “This change will help maintain the public’s confidence in the safety of their money.
“It means that depositors will be protected up to £120,000 should their bank, building society or credit union fail. Public confidence supports the strength of our financial system.”
The news has been welcomed by finance experts especially as the expected limit had been £110,000.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said it was great news.
“Savers who have their cash stashed with an institution that goes under will benefit from the higher limit,” she said, “which gets reviewed every five years, the last limit of £85,000 was set in 2017.
“It is interesting to see that the new limit is a bit higher than the Prudential Regulation Authority’s (PRA) initial proposal to increase the limit to £110,000, off the back of feedback and to ‘reflect the latest inflation data’.”
The PRA also announced the six-month temporary high balance cover will also be increased to £1.4 million from £1 million. This is for situations where people might have high amounts of money in their account, such as when they are buying or selling a house or have been in receipt of an insurance payout.
Springall added: “This is incredibly important for those who, by no fault of their own, hold significant balances from major life events, such as receiving a significant inheritance or holding cash from a house sale.
“Those who have the cash stored up in a current account would be wise to shift it to a savings account, if they anticipate holding it for more than six months to earn a better return of interest. It is particularly important to split the funds with different UK-authorised banks, building societies or credit unions to keep within the FSCS deposit protection limit.”