Topic 5: Choosing savings products

AER

• Annual equivalent rate is the interest that will be earned on the money in one year and takes into account how often the provider pays the interest (for example, monthly or annually), the effect of compounding the interest and any fees and charges

• The interest rate that the Bank of England uses when it lends money to other banks. Financial services providers take account of the Bank rate when they decide how to set interest rates on their own products

Bank rate

• Annual equivalent rate is the interest that will be earned on the money in one year and takes into account how often the provider pays the interest (for example, monthly or annually), the effect of compounding the interest and any fees and charges

• The interest rate that the Bank of England uses when it lends money to other banks. Financial services providers take account of the Bank rate when they decide how to set interest rates on their own products

Consumer Prices Index (CPI)

• One of the means the government uses to measure inflation. It is calculated by checking the price of a representative sample of goods on a monthly basis – this enables statisticians to measure how much prices are rising or falling. See also Retail Prices Index (below)

• A long-term savings account only available to children born between 1 September 2002 and 2 January 2011. CTFs were set up by the government to encourage people to build up savings for their children. They have been replaced by junior ISAs

Income tax

• Tax paid on earnings from employment, self-employment and interest on savings

• Her Majesty’s Revenue and Customs – the organisation that collects taxes on behalf of the government

HMRC

• Tax paid on earnings from employment, self-employment and interest on savings

• Her Majesty’s Revenue and Customs – the organisation that collects taxes on behalf of the government

Inflation

• A rise in prices, which means that the purchasing power of money falls

• An account from which the holder can withdraw their money at any time without losing any interest.

Interest rate

• The amount, expressed as percentage, that a financial services provider charges a borrower when it lends money, or pays to a saver.

• Money either paid to an account holder by the provider, or charged to the account holder by the provider. Interest is paid on savings accounts and some current accounts and charged on borrowing, eg an overdraft. Each provider decides the rate of interest it will pay or charge, depending on the type of account and, in some cases, the credit history of the individual account holder

Junior ISA

• Long-term savings accounts set up by a parent or guardian specifically for the child’s future. The child can only access the money once they turn 18 years old

• A provider that is backed by the Treasury (the government department that manages the UK’s finances)

Personal savings allowance

• The amount of savings interest that can be earned before the saver pays tax. The amount of the allowance varies according to how much other income the saver has earned in the tax year

• The amount a saver gains in interest on their savings. For instance an account paying 0.2% AER offers a lower rate of return than one paying 0.4% AER

Retail Prices Index (RPI)

• One of the ways the government measures inflation. It is calculated by checking the price of a representative sample of goods on a monthly basis but unlike CPI (see above), it also takes into account mortgage interest payments and other costs associated with home ownership

• A savings product held for a fixed period, eg two years. The holder can only make a limited number of withdrawals, or none at all, during that period without incurring a penalty