Savings Products Flashcards
Why do people save money?
So that they have funds too pay for goods and services in the future.
They feel safer if they have money to pay for unexpected expenses.
Define savings
Delayed spending
What might people need to pay for in the future?
Needs - eg deposit on rented flat
Wants - items that can’t be afforded on a day to day basis eg computer
Aspirations - goods or services they want / want to experience eg holiday
What do people need to consider when choosing a savings product?
- how safe their savings will be
- what the rate of return is
- if the rate of return is higher than inflation
- if they will have to pay tax on the interest earned
- how often they will be able to withdraw money
- how regularly they want to save
- how the account can be operated
Where provides savings products?
Banks
Building societies
Credit unions
Friendly societies
What do providers of savings products do with the saved money?
Providers lend the money to borrowers
What is meant by ‘return on savings’ and how is it expressed?
Return in savings is the interest that the provider pays the account holder.
Expressed as an annual equivalent rate (AER)
What is AER?
AER is the interest that will be earned on the money in one year.
Takes into account how often the provider pays the interest eg monthly / annually, the effect of compounding the interest and any fees or charges.
How do providers set their AER?
All providers calculate their AER using the same formula.
In relation to the bank of England’s bank rate and the savings offered by other providers in the market
Why are low bank rates beneficial?
Low bank rates -> low returns on savings
Encourages people to spend rather than save -> eases recession
What are the factors that impact the return offered by providers
Amount of money that us saved.
How often money is saved.
How long money is saved for.
Number of withdrawals the saver can make.
The account application and operations channel.
The tax status of the account.
Introductory bonuses.
How does the amount of money that is saved impact the return offered by providers?
Larger sums of money -> earn higher rates of return.
Usually a minimum amount has to be deposited in order to open a savings account but this varies greatly
Why does how often money is saved impact the return offered by providers?
Saving a specific amount each month -> higher rates of return
How does the length of time the money is saved for impact the return offered by providers?
Longer term savings -> higher interest rate
What are the different categories of savings account
Instant access accounts - can withdraw immediately, any time, no charge
Notice accounts - must give notice eg 90 days before withdrawing money. Pay higher AER than instant access.
Fixed period accounts / bonds - pay a fixed AER for a set period of time, limited / no withdrawals. Pay higher AER.
How does the number of withdrawals the safer can make impact the return offered by providers?
Instant / easy access allow unlimited withdrawals.
Restricted access limits withdrawals.
More withdrawals -> lower interest rate
How does the account application and operation channels impact the return offered by providers?
Accounts that the customer applies for / operates online -> higher AER.
Because customer does most of the administrative work themselves
How does the tax status of the account impact on the return offered by providers?
Interest on some accounts are tax free, others are charged a net of tax
How do introductory bonuses impact on the return offered by providers?
Some savings have fixed introductory bonuses that boost the return in the first year.
After the first year the AER drops significantly
What is inflation?
The general rise in the price of goods and services, affecting the purchasing power of money
Why do savers need an AER that is the same as the rate of inflation?
To maintain the purchasing power of their money
What was the rate of inflation in January 2015?
0.5%
What are the two indices used to measure inflation?
Consumer Prices Index (CPI)
Retail Prices Index (RPI)
How are CPI and RPI used to measure inflation?
By calculating the average change in prices of a basket of goods over a 12 month period.
What is the basket of goods used as a basis of the CPI or RPI made up of?
Around 700 consumer goods and services that represent the spending patterns of U.K. households
What is the main difference between CPI and RPI?
RPI includes mortgage interest payments and other owner occupier costs.
CPI does not
Give some causes of inflation
Greater demand for goods
Changes in wages
What was the basic-rate income tax in January 2015?
20%
Where does the provider pay the interest on savings accounts to?
The basic-rate income tax (20%) -> HMRC
Remaining 80% of interest -> the saver
How is interest rate quoted?
Unless it is tax free
Quoted as an AER that is the gross (before tax) rate and a net (after tax) rate per annum
When is a saver not obliged to pay any tax on their savings interest?
If the saver earns less than the personal al,prance for income tax
What is the basic personal allowance for majority of people?
£10,000 in the tax year
Who is given special arrangements for their basic personal allowance?
People on very low incomes
Blind
People aged over 65
To who/How do savers that pay higher rates of income tax than the 20% already deducted pay the difference?
They pay the difference to HMRC via their annual tax return
What changes did the government make to the way in which savings interest is taxed (2016)?
• Providers now pay all interest gross (before tax).
-> savers pay all interest they owe.
• Savers have a personal allowance for the amount of savings interest they receive before any income tax is charged..
-> £1000 for basic rate taxpayers, £500 for higher rate taxpayers, additional rate taxpayers don’t have a savings interest allowance
What does ISA stand for?
Individual savings account
Is the interest on ISAs taxed or not?
Free of tax
Why are ISAs popular with savers?
AER tends to be very competitive
What does NISA stand for
New ISAs
When / how were NISAs created?
New individual savings accounts -
In 2014 a new ISA limit was introduced, restrictions were removed on how much money could be saved in stocks and shares
How can money be invested into NISAs?
As cash
As stocks / shares
At what age can you get a NISA?
Cash NISA - 16
Stocks as shares NISA - 18
Is interest on NISAs tax free?
Cash NISAs - free of income tax
Stocks and shares NISAs - free of income tax where the return is in the form of interest, income tax is payed where return is paid in the form of dividends
What was the maximum amount that could be deposited into a NISA per year in 2015-16?
£15,240 - can be split in any proportion between cash / stocks and shares
How many NISAs can a saver hold at one time?
One cash NISA
One stocks and shares NISA
Do cash NISAs offer instant access or fixed terms?
Depends on the terms of the account
Who are junior ISAs designed for?
Under 18s
What is the deposit limit for a junior ISA?
£4,080
At what age do parents need to open a junior ISA for their child / what age can a child open their own junior ISA?
Parents - under 16
Own - 16/17
Who can deposit/withdraw money from junior ISAs?
Deposit - anyone
Withdraw - the child once they’re 18
What does FSCS stand for?
The Financial Services Compensation Scheme
What does the FSCS do?
Guarantees 100% payment to the saver of what is owed up to £85,000 per person per provider.
If the provider is unable to pay the account holder their savings
What does NS&I stand for?
National Savings and Investments
Who is NS&I useful to? Why?
People who want 100% of their savings guaranteed, regardless of the amount.
It is backed by Her Majesty’s Treasury
What accounts does NS&I offer?
Cash NISA, instant access save fa, longer term savings
Which is more risky, cash savings or stocks and shares? Why?
Stocks and shares.
They can gain or lose value according to movements in the stock market -> unpredictable
