Topic 5 - Saving Products

Define “return on savings”

The interest rate the provider pays the account holder and is expressed as an annual equivalent rate (AER)

Factors that affect the return on savings

1. Amount of money saved - the more money saved, the more returns gained. Usually minimum amounts have to be deposited in order to open

2. How often money is saved - people receive higher rates of return by saving a specific amount each time.

3. How long the money is saved for - the longer the money is held for, the higher the interest rate. There are different types of savings accounts for this:

   1. Instant access - withdraw money ant any time

   2. Notice accounts - must give a notice to inform providers that you will withdraw, has a higher AER.

   3. Fixed period accounts/bonds - fixed AER but limited or no withdrawals.

4. Number of withdrawals - Instant access or easy access allow many withdrawals but restricted access only allows a certain amount per year.

5. Amount application and operational channels - accounts that operate online have higher AER because the account holder does most of the administration.

6. Tax status of the account -interest earned on some accounts are tax free whilst on other accounts the saver must pay tax on any interest that exceeds their personal savings allowance.

7. Introductory bonuses - some accounts have fixed introductory bonuses which can boost the return in the first year.

Impact of inflation

• Inflation affects purchasing power

• Savers need to earn an AER that is the same rate or greater than the rate of inflation to maintain the purchasing power.

• If AER is greater than the inflation rate, the real value of their savings will grow as its purchasing power is increasing.

• Two indices are used to measure inflation:

  • Consumer Prices Index (CPI)

  • Retail Prices Index (RPI)

• Basket of goods is used as the basis of CPI or RPI.

Help to buy ISAs

• First time buyers can save up to £200/month towards their first home and the government will boost their savings by 25% when the account closes.

• First time savers who save £12000 in this can get £3000 max bonus.

• Accounts for individuals.

• Couple can both receive a bonus each in their own accounts.

Individual Savings accounts (ISAs)

• This interest is paid free of tax

• Very popular as AERs tend to be competitive

• Cash ISAs are available for savers from the age of 16, stocks and shares ISAs from age of 18.

Junior ISAs

• designed for savers under 18 with a specified deposit limit

• only available to young savers who don’t have child trust fund

• anyone can pay into these accounts as long as the yearly deposit limit isn’t reached

• only the child can withdraw money - can only withdraw when they are 18.

Financial Compensation Scheme (FSCS)

• Guarantees up to £85,000 of savings in the UK.'

• This means that if the provider is in default - unable to pay the account holders their savings, the FSCS will pay what is owed - max £85,000

Cash versus stocks and shares

Stocks and shares are more risky than cash as they can gain or lose value depending on the movements in the stock market - these changes are unpredictable.

National Savings and Investments (NS&I)

• This provider is used by people who want 100% of their savings guaranteed regardless of the amount.

• Provider offers a range of savings products:

  • Cash ISAs

  • Instant Access Savings accounts

  • Longer-term savings

What does safety mean in terms of savings?

The likelihood that the money saved will be available in the future when it is needed.

Factors to be considered when saving

• Return

• Inflation

• Tax Status

• Access

• Frequency of deposits

• Operation

• Safety

• Provider

• Eligibility