5.1 Return On Savings Flashcards
AER
Annual equivalent rate
interest that will be earned on the money in one year
What does AER take into account
How often the provider pays the interest
Effect of compounding interest
Any fees
AER formula
All providers must use the same formula set out in the Code of conduct
Published by
- British Bankers’ Association and
- Building Societies Association
Comparing the return on savings
AERs
Gross figures
Set the AER on a particular product in relation to
- The Bank of Englands bank rate
- the savings rates offered by other providers in the market
BoE bank rates
Control interest rates
To control the rate of inflation.
MPC
Monetary policy committee ( of the Bank of England )
meets regularly to consider whether to change the bank rate
Low bank rate
savers receive low returns on their savings
encourage people to spend rather than to save and so ease the Recession
How to achieve higher rates of return
By saving a specific amount each month
The longer the term that the savings are held…
The higher the interest rate tends to be
Instant access account
Withdraw immediately at any time
No charge
Notice accounts
Advise their provider a set amount of time before withdrawing
Pay higher AERs than an instant acc
Failure :
Fixed period accounts / bonds
- pay a fixed AER for a set period of time
- provider may allow only a limited
amount of withdrawals or none in this time - higher AERs than notice and instant access accounts
The account application and operation channels
- Accounts that the customer applies for and operates online tend to offer higher rates of return
- because the customer does most of the administrative work
The tax status of the account
2015 Budget Conservative–Lib Dem coalition Gov announced changes to the way that savings interest is taxed.
-interest on some accounts is tax free others pay tax on whatever exceeds ‘personal savings allowance ‘
