SAVERS are set to lose millions of pounds in interest after forgoing the best rates in the scramble for safety last week.

The warning came as the Financial Services Authority (FSA), the City watchdog, announced it would raise the limit on the amount of savings that are guaranteed if a bank goes bust from £35,000 to £50,000 from Tuesday.

Banks and the Treasury claim the move will cover up to 98% of savers, but that leaves 1.1m people above the threshold and they own at least 40% of deposits by value, according to investment bank Credit Suisse. This means some £500 billion of savers’ deposits remains unprotected.

Consumers are therefore likely to keep switching to the handful of institutions that offer a cast-iron guarantee. The FSA will consult on whether the compensation limit should be higher still.

Jonathan Pierce at Credit Suisse said: “The bare statistics demonstrate that modestly adjusting the compensation limit will do very little. If the aim is to sufficiently bolster confidence, we think the cap needs to be increased markedly – 27% of balances are over £100,000.”

The Irish government sparked the flight to safety last week when it decided to guarantee in full all deposits at six of its biggest institutions until 2010. The pledge covers Bank of Ireland, which provides some of the Post Office’s savings products.

Millions also poured into National Savings & Investments (NS&I) and Northern Rock, which are both fully guaranteed by the British government.

Gordon Brown, the prime minister, will get an unexpected boost from these inflows – NS&I made the Treasury £375m in 2007-8 and the figure could be even higher this year.

However, analysts raised concerns that savers were piling into poor deals, potentially sacrificing £74m in annual interest.

Moneysupermarket, the comparison site, reported that one in four savers were heading for the Irish banks last week and of those, many were choosing the Post Office. Its Instant Saver, which pays 5.75% including a 1.5 percentage point bonus for 12 months, was particularly popular.

This compares with a rate of 6.51% on Bradford & Bingley’s internet saver, which is now owned by AA-rated Banco Santander and has the implicit backing of the British government. You would earn an extra £380 interest a year on £50,000 with B&B rather than the Post Office.

In total, savers could lose £74m assuming that a quarter of the £40 billion saved every year goes into Irish banks.

Analysts have also raised concerns that the Dublin guarantee is not as cast iron as it seems. Competition lawyers said last week that the Irish government could be forced to withdraw its pledge if it is found to contravene European state aid rules.

The Irish government was forced to stand behind its banks after shares in Anglo Irish, which has a UK savings business and regularly tops the best-buy tables here, fell 46% at one stage on Monday.

Kevin Mountford of Moneysupermarket said: “Anglo Irish is offering good rates as it has funding issues and you have to question how long they can be sustained.”

Northern Rock was still taking millions in new business despite pulling its best rates last week. Its top easy-access account, Branch Saver, paid only 4.9% – £800 a year less than B&B on £50,000 – and even that had to be pulled on Friday.

It was also reported that half of all new money in NS&I, which took £4 billion in deposits in the three months to June, was going into tax-free premium bonds. However, the rate is adjusted to take account of the tax break. The current odds of 22,000 to 1 are equivalent to a rate of just 3.4%.

Your questions answered on the new £50,000 guarantee

What has been announced? The Financial Services Authority (FSA) will increase the compensation limit for bank deposits from £35,000 up to a total of £50,000 for each customer’s claim from Tuesday. Customers with joint accounts will be eligible for £100,000.

Could it go up further? Yes, the FSA is to consult on further reforms, including whether the compensation limit should be higher still; the speed with which the Financial Services Compensation Scheme (FSCS) can pay compensation; and the rules on how different brands are treated.

How does it work at the moment? At present, you get one limit for each company independently registered with the FSA, even if it has several brands. So, for example, you get just one limit for the whole of HBOS, which includes Halifax, Bank of Scotland, Intelligent Finance, Birmingham Midshires, Saga and the AA. Get more details on who owns what at moneysavingexpert.com/savings/safe-savings.

What about foreign banks? Banks from outside Europe are required to set up a UK subsidiary which has to be a member of the FSCS. There is one exception called the “passport scheme” which allows some European banks to have some of the compensation covered by their home country and the rest topped up by the FSCS. With Icesave, for example, €20,000 (£15, 570) would be covered by the Icelandic scheme and the rest by the FSCS; with ING, €38,000 would be covered by the Dutch scheme.