Certificate in Financial Studies – Unit 1 (FCIS)

Topic 5 – Savings Products – 100% Sheet

Choosing a Savings Product Return on Savings Continued Notice Accounts Account Application/Operation
Channels
All providers must use the same formula a saver has to give notice, that is, to
Accounts that the customer applies for
to calculate the AER they quote in advise the provider a set amount of time
and operates online tend to offer higher
advertising so that people can compare before withdrawing money. Notice
rates of return than accounts that are
the return on different savings products. accounts usually pay higher AERs than
operated by a passbook in a branch, or
This formula is set out in the Code of instant access accounts. Failing to give
by cash card, telephone or post. This is
Conduct for the Advertising of Interest notice usually results in the loss of the
because the customer does most of the
Bearing Accounts published jointly by interest earned during the notice period
administrative work themselves when
the British Bankers’ Association and the – for example, if the notice period is 90
operating a product online (such as
Building Societies Association. days, a saver who did not give notice
typing in their name and address details
When comparing the return on savings it would lose 90 days’ worth of interest.
and transferring funds between
is important that people compare like
accounts). Providers have to pay the
with like, for example, AERs, gross Fixed Period Accounts of Bonds costs of running branches and paying
figures (before income tax) or net figures
these products pay a fixed AER for a set staff for customers who want to go into a
(after income tax). Some provider
period of time, such as six months or two branch.
adverts show a ‘headline’ interest rate
using a large font. years. The provider may allow only
Potential savers need to explore what limited withdrawals or no withdrawals Tax Status of the Account
Why do People Save? this headline rate means before making during the term. These products usually
The interest earned on some accounts is
a decision about which account to use. pay higher AERs than instant access
People save so that they have the funds to tax-free while on other accounts the
accounts and notice accounts with
pay for goods and services in the future. provider pays the interest to the saver
shorter terms.
Savings are therefore ‘delayed spending’. How long the money is saved? net of tax.
One advantage of fixed period accounts
The future payments may be for: The longer the term that the savings are or bonds is that the fixed rate of return
needs – such as paying a deposit on a held, the higher the interest rate tends means savers know what the AER will be
rented flat; Introductory Bonuses
to be. For example, Claire has a six- throughout the life of the product.
wants – items that savers cannot afford on month fixed savings bond that pays Some savings accounts have fixed
a day-to-day basis, such as computer; Products that are instant access or introductory bonuses that boost the
1.30% AER while her sister Diane has the
aspirations – goods or services that they notice accounts usually have variable return in the first year of the account.
two-year version of the product, which
would like to have or to experience in interest rates that move up and down
pays 2.10% AER. Their older sister
the future, such as a holiday with changes in the Bank rate.
Rebecca has the four-year version of the
Impact of Inflation
product, paying 2.40%
Return on Savings AER. There are different categories of Withdrawals Topic 1 explained that inflation – that is,
savings account: Savings accounts called ‘instant access’ a general rise in the price of goods and
The return on savings is the interest that
or ‘easy access’ allow as many services – affects the purchasing power
the provider pays the account holder and
withdrawals as the saver wants, whereas of money because £100 in one year’s
is expressed as an annual equivalent rate Instant access accounts
some accounts are called ‘restricted time buys less than £100 buys today.
(AER), such as 2.2% AER. The AER is the a saver can withdraw money
access’ and only allow a certain number Savers need their money to earn an AER
interest that will be earned on the money immediately from these at any time with
of withdrawals to be made each year. that is the same as the rate of inflation
in one year and takes into account how no charge.
For example, Will’s savings are earning to maintain the purchasing power of
often the provider pays the interest (for
0.50% AER in an instant access account their money. If the AER is higher than
example, monthly or annually), the effect
while Ted’s savings are earning 2.00% inflation, the real value of their savings
of compounding the interest and any fees
AER from the same provider in a product will grow because its purchasing power
and charges.
that allows a maximum of five is increasing. In May 2013 inflation was
withdrawals per year. 2.7%, higher than all the savings
account AERs quoted above.

Individual savings accounts (ISAs)

Topic 5 – Savings Products – 100% Sheet

Impact of Inflation Continued The interest on individual savings Financial Services Compensation Choosing Savings Products
accounts (ISAs) is paid free of tax. The Scheme (FSCS)
This means that the real value of these Features to consider when choosing
government introduced ISAs in 1999 to The Financial Services Compensation
savings is falling. The Bank of England is savings products:
encourage people to save. They are Scheme (FSCS) guarantees up to
tasked with managing inflation to meet the Return
popular with savers, whether or not they £85,000 of savings in UK banks, building
government’s target of 2.0%. Two indices Inflation
pay tax, because the AERs tend to be societies or credit unions that are
are used to measure inflation: Tax Status
very competitive. The money in an authorised by the UK regulator, the
the Consumer Prices Index (CPI); and Access/Term
individual savings account (ISA) can be Financial Conduct Authority (FCA).This
the Retail Prices Index (RPI). Frequency of Deposits
invested in cash and / or stocks and means that if the provider
The CPI is used to measure the inflation Operation
shares. Cash ISAs are available for is in default – that is, it is unable to pay
rate managed and quoted by the Bank of Safety
savers from the age of 16 and stocks account holders their savings – the FSCS
England. Both the CPI and RPI measure Provider
and shares ISAs are available for savers will pay 100% of what is owed up to
inflation by calculating the average change Eligibity
from the age of 18. The interest on a £85,000 per person per provider.
in prices of a basket of goods over a 12-
cash ISA is paid free of income tax and According to the FSCS, 98% of the UK
month period. An inflation rate of 2.7%
the return on a stocks and shares ISA is population has less than £85,000 in
therefore means that overall prices are
paid free of capital gains tax savings and are therefore covered for all
2.7% higher than they were 12 months
of their savings under the compensation
ago.
Junior ISAs scheme. The FSCS is an independent
Taxation As well as the adult ISA described above, body set up under the Financial Services
there is a Junior ISA designed for savers and Markets Act 2000 (FSMA) and makes
The interest on most savings accounts is no charge to savers for using its service.
under 18. The Junior ISA
subject to basic income tax (20% in March
also pays interest free of tax and offers
2013). The provider pays this tax direct to
cash and / or stocks and shares options. National Savings and Investments
Her Majesty’s Revenue and Customs
The Junior ISA replaces the Child Trust (NS&I)
(HMRC) and pays the saver the remaining
Fund (CTF) account, so is only available People who want 100% of their savings
80% of the interest due. This is known as
to young savers who do not have a CTF. guaranteed, regardless of the amount,
‘deducting the tax at source’. Unless the
Parents and guardians with parental can save with National Savings and
savings account pays interest tax-free, the
responsibility can open a Junior ISA for Investments (NS&I) which is backed by
interest rate will be quoted as an AER that
savers who are under 16 years old; Her Majesty’s Treasury. This provider
is the gross (before tax) rate and a net
people aged 16 or 17 can open their own offers a range of savings products
(after tax) rate per annum or per year.
Junior ISA. Anyone can pay money into a including cash ISAs, instant access
Savers who earn less than the personal
Junior ISA as long as they do not exceed savings accounts, and longer-term
allowance for income tax do not need to
the deposit limit for the tax year. savings.
pay any tax on their savings interest. They
can register to have the interest paid gross
or can claim a refund of the tax that has Safety
Cash versus stocks and shares
been deducted. The basic personal ne of the reasons that people save is to
allowance for most people (there are have funds to call on in emergencies and This topic focuses on cash savings
specific arrangements for people on very in old age. Safety – that is, the likelihood products rather than investments linked
low incomes, the blind and those aged that the money saved will be available to stocks and shares. These types of
over 65) is £9,440 in the tax year 2013– when needed in the future. investment are much more risky than
2014 (HMRC, nodate (a)). cash as they gain or lose value according
to movements in the stock market which
can be unpredictable.