Topic 5 - Savings products

Question 1

Why do people save?

Answer 1

To have funds to pay for goods and services they aspire to have in the future.

Question 2

What are the factors people need to consider when choosing savings products?

Answer 2

• rate of return
• whether rate of return is higher than inflation
• how safe savings will be
• how they will operate the account
• how regularly they want to save

Question 3

What is AER?

Answer 3

The interest rate that will be earned on the money saved in one year.

Question 4

Why must all providers use the same formula to calculate the AER they set?

Answer 4

So people can compare the rate of return on different savings products

Question 5

What is a provider’s AER that they set based on?

Answer 5

The bank rate that is set by the Bank of England, and savings rates offered by other providers.

Question 6

What do the Bank of England use the Bank Rate for?

Answer 6

Control interest rates that providers set on their saving/borrowing products, and control rate of inflation

Question 7

What does a low bank rate mean?

Answer 7

Saver recurve low returns on savings. This encourages people to spend rather than save, which would ease a recession

Question 8

How does the amount of money saved in account impact the return offered by providers?

Answer 8

Larger sums of money earn higher rates of return

Question 9

How does the frequency of money saved affect rate of return?

Answer 9

People can receive higher returns on savings by saving a specific amount of money each month

Question 10

How does the time period of saving affect the rate of return?

Answer 10

The longer the money is saved for, the higher the interest rates tend to be

Question 11

How do account applications/operation channels affect rate of return?

Answer 11

Accounts that customers apply for and operate online tend to have higher rates of return than those in-branch, as the customer does most of the administration work themselves

Question 12

How does tax status of a savings product affect rate of return

Answer 12

Interest earned on some accounts is tax free, whereas some accounts require tax on interest that exceeds a customer personal savings allowance

Question 13

What are ISAs (instant access accounts)?

Answer 13

Accounts that allow savers to withdraw money immediately at any time, free of charge

Question 14

What are notice accounts?

Answer 14

A savers account where the saver has to give the provider a notice a set amount of time before withdrawing money. These usually pay higher AERs than instant access accounts.

Question 15

What are fixed period accounts/bonds?

Answer 15

Accounts that pay fixed AER for a set period of time. The provider might allow only limited or no withdrawals during the term, and these products have higher AERs than ISAs and notice accounts

Question 16

Define inflation

Answer 16

A general rise in the prices of goods and services, which affects the purchasing power of money.

Question 17

Why should savers have an AER higher or at the same rate as inflation?

Answer 17

To maintain the purchasing power of their money. If AER is higher, the real value of their savings increases

Question 18

How is inflation measured?

Answer 18

CPI - consumer prices index
RPI - retail prices index

Question 19

How are RPI and CPI used to measure inflation?

Answer 19

They both calculate the average change in prices of a basket of goods over a 12 month period.

Question 20

What is the ‘basket of goods’?

Answer 20

It’s made up of 700 consumer goods and services that represent spending patterns of UK households.

Question 21

What is the main difference between CPI and RPI?

Answer 21

RPI included mortgage interest payments, CPI does not.

Question 22

What is a personal savings allowance?

Answer 22

The amount of savings interest a saver can receive before any income tax is charged.

Question 23

What are cash ISAs

Answer 23

ISAs available for saves aged 16 and above. The interest paid on a cash ISA is free of tax and doesn’t count towards a savers personal allowance.

Question 24

What are stocks and shares ISAs?

Answer 24

ISAs available to saver aged 18 and over. The return is paid free of income tax.

Question 25

What are Junior ISAs?

Answer 25

Designed for savers under 18, with a specific deposit limit. Pays interest free of tax.

Question 26

What are Help to Buy ISAs?

Answer 26

These are ISAs that help first time buyers save up to £200 a month towards their first home. All interest earned is tax free

Question 27

What are lifetime ISAs?

Answer 27

ISAs for those aged over 18 and up to 40 to help buy their first home or save for retirement.

Question 28

What is the Financial Services Compensation Scheme?

Answer 28

This scheme guarantees up to £85,000 of savings in UK banks, building societies and credit unions authorised by the FCA.

Question 29

What is NS&I?

Answer 29

For those who want 100% of their savings guaranteed, regardless of amount saved. This is backed by Her Majesty’s Treasury. This provider offers a range of savings products e.g. cash ISAs, longer term savings