Irish banks currently offer some of the best interest rates available, but fears about the health of the country’s banking system are making savers nervous.

Now customers with money in the Post Office have been informed that because it is a subsidiary of Bank of Ireland, their money is no longer protected by the Financial Services Compensation Scheme (FSCS). Instead, all deposits are guaranteed by the Irish government.

Even though the Irish government’s compensation exceeds the FSCS limit, financial advisers say many customers are unhappy with the change.

Prior to September, savers who had money in Anglo Irish Bank, along with all other Irish banks operating in the UK such as Allied Irish and Bank of Ireland, were “passported” into the FSCS. This meant that the UK topped up any compensation provided by the bank’s local protection scheme to £50,000.

But when the Irish government decided to protect 100 per cent of savings held in Irish banks, this passport became invalid. This means UK savers with money in Irish banks are no longer protected by the FSCS.

The issue of compensation has become more pertinent since Anglo Irish Bank, which offers a fixed-rate bond paying 3.4 per cent, was nationalised.

Investor confidence in other Irish banks is now falling. Some analysts fear that the Irish government does not have the capacity to absorb the failure of a bank and pay out compensation, leaving savers questioning just how safe their money is.

“Customers are asking how safe the Irish banks are, and how safe the Irish government guarantee is, and there are no easy answers to this,” said David Black, principal banking consultant at Defaqto, the market analyst.

Savers have become palpably more cautious about where they put their money following the collapse of banking institutions such as Northern Rock.

By now it has become standard practice for advisers to recommend that all savers limit their cash deposits to the £50,000 per institution protection offered by the FSCS. But, confusingly, not every savings account available in the UK is covered by this scheme.

Banks authorised by the Financial Services Authority are covered by the FSCS. This includes UK high street banks as well as foreign-based banks outside the European Economic Area (EEA) that operate in the UK, such as Indian-owned ICICI and Turkish Bank.

But EEA banks do not come under FSA regulation so savers with money in these are not protected by the FSCS. Instead, they receive the national compensation offered by the bank’s national regulator.

European banks protect at least €20,000 [£18,500] of savings, and can also choose to use the FSCS to provide extra protection up to £50,000.

For example, ING, the Dutch bank which offers a savings rate of 4 per cent, comes with a minimum safety net of €20,000 per depositor, topped up to £50,000 by the FSCS.

The FSCS has a full list of banks covered at: www.fscs.org.uk/consumer.

Banks in Iceland, Liechtenstein and Norway, which operate within the EEA, but not the EU, are covered by their local regulator and are not subject to the EU €20,000 minimum protection, but can also choose to be passported into the FSCS if they wish.

However, the passport system came under strain following the collapse of Icelandic banks. Thousands of UK savers had been attracted to open accounts with the banks as they offered such high interest rates. The UK government stepped in and promised to protect the full amount of UK deposits made in Icelandic banks when doubts arose about Iceland’s ability to pay out money.

So far, savers with money in banks that have failed have been fully compensated by the UK government, but there are no hard and fast rules to say that this will always be the case.

For savers who have concerns and wish to move their money to a UK-based bank, the best fixed rate on offer is 4 per cent from Wesleyan Bank, according to Moneyfacts, the savings monitor. Northern Rock and National Savings & Investments are the only two UK institutions with deposits fully guaranteed by the government.

But one obstacle could be removing money from the Irish banks. Customers with fixed- term accounts may be penalised for removing their money early and could find themselves forced to defend their decision.

In the case of Anglo Irish, customers can only remove money if they experience an “emergency”. What constitutes an emergency is up to the bank to decide. Customer worries over the Irish banking system are unlikely to meet the criteria.