Topic 5 - Saving Products

Question 1

Why do people save?

Answer 1

So that they have the funds to pay for goods and services in the future.

Question 2

What are savings?

Answer 2

Delayed spending

Question 3

What could delayed spendings be for?

Answer 3

Needs - paying a deposit on a rented flat
Wants - items that savers cannot afford on a day to do basis eg computer
Aspirations - goods or services that they would like to have or to experience on the future such as holidays

Question 4

What 7 factors should be considered when choosing savings on a product?

Answer 4

• how safe they will be?
• how regularly I want to save them?
• how often will I be able to withdraw money?
• will I pay tax on the interest on the savings earnt?
• is the rate of return higher than inflations?
• what is the rate of return?
• how will the account be operated?

Question 5

What is return on savings?

Answer 5

The intrest received from the provider payed by the account holder
Expressed as AER - annual equivalent rate

Question 6

what is the AER?

Answer 6

Interest earned on the money in one year

Question 7

How is AER decided?

Answer 7

by the provider of the savings account
- takes into account fees, charges with the account and whether the interest is paid (e.g. monthly or annually)

Question 8

What can make the return on savings higher? (7)

Answer 8

• The amount of money that is saved
• how often money is saved
• The length of time that they are held for
• number of withdrawals a saver can make
  
  • an instant access account where the money can be withdrawn at any time will offer a lower rate of j retest
• introductory bonus rate (just opening an account)
• account opporation and application channels
  
  • online is cheaper
• the tax status of the account

Question 9

what is meant by inflation?

Answer 9

sustained increase in the general price level

Question 10

What must the relationship between the AER and inflation rate be to maintain purchasing power of their money? And why?

Answer 10

-AER must be the same as or higher than the rate of inflation
- if the AER is high than inflation, the real value of their savings will grow because it’s purchasing power is increasing

Question 11

What is the CPI?

Answer 11

The consumer prices index

Question 12

What is the RPI?

Answer 12

The retail price index

Question 13

What is the CPI used for?

Answer 13

To measure the inflation rate managed and quoted by BofE

Question 14

How does the CPI and RPI measure inflation?

Answer 14

By calculating the average change in price of a basket good over a 12 month period

Question 15

What’s the difference between a CPI and RPI?

Answer 15

RPI includes mortgage internet payments and other owner occupier costs, while CPI does not

Question 16

What is an ISA?

Answer 16

Individual saving account that is paid free of tax

Question 17

Why are ISAs good?

Answer 17

They were introduced by the government in 1999 to encourage people to save.
This is because AERs tend to be very competitive.

Question 18

What was introduced to reduce how much can be saved in stocks and shares?

Answer 18

An ISA limit

Question 19

What can be done with the money in ISAs?

Answer 19

Invested in cash or stocks and shares.

Question 20

What are the two different types of ISAs

Answer 20

Cash
Stocks and sharws

Question 21

What is a cash ISA

Answer 21

An ISA available from the age of 16.
Interest is paid free of income tax and does not count towards the savers personal savings allowance.

Question 22

What is a stocks and shares ISA?

Answer 22

Available for savers from age 18
Return on stocks and shares ISA is paid free of income tax where the return is in the form of interest.
Any growth in the value of capital invested in a stocks and shares ISA is not subject to capital gains tax.

Question 23

What limits are there on ISAs?

Answer 23

• savers are on,y allowed to contribute to one cash +/ stocks and shares ISA in a tax year
• there is a maximum amount that can be deposited into an ISA in a tax year.

Question 24

Savers can transfer funds between ISAs. What are these dependent on?

Answer 24

The terms of both original isa and the new isa

Question 25

What is a junior ISA? (3

Answer 25

• designed for savers under 18
• it’s only available for those who don’t have a child trust fund account (CTF)
• an individual with parental responsibilities of the child can open an account in their name. However only the child can have access to the account once they turn 18

Question 26

What is a help to Buy ISA?

Answer 26

• First time buyers are able to save up to £200 a month towards their first home in a Help to Buy ISA and the government will boost their savings by 25% when the account is closed. - a £50 bonuses for every month saved, all interest earned is tax free
• buyers who safe 12k will be eligible for the maximum govt bonus of £3k
• as the accounts are for individuals, couples can save separately both receiving the govt bonus.

Question 27

Who is eligible for a lifetime ISA?

Answer 27

Anyone aged over 18 and under 40

Question 28

What is the purpose of a lifetime ISA?

Answer 28

To buy a first home or to save for retirement

Question 29

How does a Lifetime ISA work?

Answer 29

-Up to £4k can be saved every year until the saver is 50.
-The government will add a bonus of 25% at the end of every tax year.
-access to it is given when they buy their first home or when they reach 60 and keep the bonus otherwise you pay the 25% withdrawal charge on the total, losing the govt bonus

Question 30

What is safety in terms of money?

Answer 30

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

Question 31

what does FSCS stand for?

Answer 31

Financial Services compensation scheme

Question 32

what does the FSCS do?

Answer 32

garuntee £85k of savings in any uk banks

Question 33

what is the NS&I?

Answer 33

National savings and investments are guaranteed by hmt (His majesties treasury

Question 34

What form can savings be in?

Answer 34

cash or stocks and shares.
- stocks and shares are more risky than cash savings as the value can go down as well as up
- recently due to the low interest rates sns savings hav outperformed cash