Savings terminology – glossary and jargon buster

Savings Terminology - glossary and jargon buster

 

Savings GlossarySavings accounts seem pretty straightforward at first glance.

But sometimes it helps to have a glossary on hand to reassure yourself about the meaning of a particular term.

So if you want to know your structured products from your combination bonds - you're in the right place!

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

AER (Back to Top)

Savings AER - or Annual Equivalent Rate - is a representative interest rate designed to help you compare savings accounts. It shows the actual interest rate you would get if you kept money in the account for a full year. In contrast to a gross rate, AER takes into account compound interest and any introductory bonus rates to give a more accurate illustration of the interest you'll receive. Read more about AER.

Anniversary interest

Where savings interest is paid on the yearly anniversary of you taking out the account.

Annual interest

Where interest is paid on your savings every year, on a set date.

B

BACS payment (Back to Top)

See "Electronic payments".

Base rate

Base rate usually refers to the Bank of England base interest rate. Savings interest rates are loosely determined by base rate (together with other factors). Some accounts, such as tracker bonds, follow changes in the base rate, with others offering rate guarantees linked to it.

Building Society

A building society is a type of financial institution that provides mortgages and savings accounts to its customers (as well as other banking services). Many of a building society's customers are also members - the society is run for the benefit of members rather than shareholders. Building societies are also limited by law as to how much they can borrow from other financial institutions. This has traditionally seen them regarded as more stable and sustainable than banks.

Bond

A bond basically means a promise. In terms of savings, this means that you promise to keep your cash in an account for a set period. In return you would get a higher interest rate than if you gave no such assurances. You generally can't access your money early with a bond, although recently some providers will allow access at the expense of an interest penalty (this is more likely with longer term than shorter term bonds).

Bonus - introductory

An introductory bonus is most commonly offered on easy access savings accounts or easy access cash ISAs. The bonus forms part of the initial interest rate and will generally last for 12 months. When the bonus ends the interest rate will reduce - quite considerably in some instances.

Bonus - conditional

A conditional bonus is where the rate you get is dependent on how you manage your account. For example, you may get a rate of 1.50% if you make fewer than four withdrawals per year, falling to 0.75% if you make four or more.

C

Capital Gains Tax (Back to Top)

This is a tax on any profit made on the increase in the value of an asset since it was purchased. Capital Gains Tax isn't payable on savings interest, although it may be payable on gains made on an investment, when you come to sell it.

Cash ISA

A cash ISA is a savings account that pays interest tax-free. It is not a type of savings account in itself, so you can get all the variations that you can with a normal savings account (fixed rate bonds, easy access, regular savings, etc.). You can only pay a maximum amount into a cash ISA per tax year (6 April to the following 5 April). In the 2016-17 tax year this limit is £15,240 (providing you have not put more than £15,240 in an investment ISA or Innovative Funding ISA also).

CGT

See "Capital Gains Tax".

CHAPS payment

See "Electronic payments".

Child Trust Fund

Child Trust Funds (CTF) were a form of tax-efficient saving offered to children born between 1 September 2002 and 2 January 2011. Money cannot be accessed until the child turns 18 (although the child can take over management of the fund from the age of 16). Although no longer available to open, you can still transfer to a more competitive CTF account as well as making further contributions to the fund. In the 2016-17 tax year (6 April 2016 - 5 April 2017) you can contribute up to £4,080 into a Child Trust Fund. Children under the age of 18 and born before 1 September 2002 can open a Junior ISA instead, as can children born after 2 January 2011. Children that have a CTF are now able to transfer funds to a Junior ISA if they wish, but they cannot have both types of account.

Collective investments

Collective investments can be better than investing directly in shares or commodities. This is because you can benefit from a greater spread of different investments (which can reduce investment risk) as well as from lower dealing costs due to the economies of scale you can get with large-scale investment transactions. There are four types of collective investments: investment trusts, life assurance bonds, OEICs and unit trusts.

Investments can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.

Compound interest

When you earn interest on your savings it either gets paid into a separate account, or it gets added to your savings balance. If it gets added to the account balance, then next time you earn interest you'll earn it on the new balance (the original amount you paid in, plus any interest already added). It's this earning interest on interest that is known as compounding. Read more about compound interest.

Consumer Prices Index

The Consumer Prices Index (CPI) is a key measure of inflation used by the Government. It uses a "basket" of goods and services to monitor how the cost of living is going up or going down annually. In contrast to the other main measure of inflation, the Retail Prices Index (RPI), CPI does not include housing costs such as council tax and mortgage interest.

This is relevant to savings as if the rate of inflation is higher than the interest rate paid on your savings balance, you are losing money in 'real terms'.

Corporate Bond

Not to be confused with a savings bond, a Corporate Bond is a form of investment. It is essentially a loan to a specific company that pays a fixed rate of interest. The company then uses the funds for its business purposes e.g. for new product development or expansion.

CPI

See "Consumer Prices Index".

Credit union

A credit union is a kind of member's co-operative run by its members, for its members. It is not-for-profit and offers current accounts and savings accounts (including ISAs), as well as loans. You can usually only join a credit union if you meet a particular union's eligibility rules, which could depend on:

  • Where you live
  • What your job is
  • What organisations you belong to

Credit unions are regulated by the Financial Services Authority, and any money you deposit with one is covered by the Financial Services Compensation Scheme. Read more about credit unions.

CTF

See "Child Trust Fund".

D

Deposit (Back to Top)

A deposit is an amount that you pay into a savings account.

Depositor

The person who pays money into a savings account.

Depositor protection schemes

Government-backed schemes that protect savings customers in the event that a bank, building society or credit union goes bust. In the UK savers are protected by the Financial Services Compensation Scheme (FSCS). Read more about depositor protection.

Direct debit

A direct debit is an automated payment that you can set up from your current account. It will send a regular payment (normally monthly, quarterly or yearly) to the person or company you wish to pay. In the context of savings accounts, some will let you set up a regular direct debit or standing order to your savings account so you don't have to remember to physically do it yourself. The main difference between a direct debit and a standing order is that with a direct debit how much you pay and when can be changed by the person or company you're paying. With a standing order these details can only be changed by you. Read more about direct debits

E

Early access (Back to Top)

If you think you'll need to use your savings, you will need to access them from your account. Some accounts will let you get at your money easily with instant or no notice access. However, others may require you to give notice before you can make a withdrawal. Some accounts - mainly fixed rate bonds - will not allow you to access your money at all before the term of the bond ends. If you can access your money early from a bond, be prepared to forfeit some interest (some notice accounts may allow you to bypass the notice period by forfeiting interest too).

Easy access

Easy access accounts allow withdrawals to be made without notice or an immediate penalty. However, many accounts now restrict the number of withdrawals you can make without a reduction in the interest you earn in the future. If the account is operated by post, phone or the internet, the account will be called easy access as the money is not available in cash straight away. Where the account is managed at a branch or has a cash card, it may be advertised as instant access.

Electronic payments

There are two types of electronic payment: BACS and CHAPS. Electronic payments have the distinct advantage over cheques as they clear a lot quicker.

  • BACS is a way of sending money from your bank account, to another bank account quickly. Often payments go through in the same day, a distinct advantage over a cheque which could take several days to clear. However, same day payments are not guaranteed (as they are with CHAPS payments).
  • A CHAPS payment is guaranteed to reach the account of the person or company you are trying to pay on the same working day, providing that you request to make the payment before 3pm on a working day.

Endowment

An endowment policy is a life assurance based investment. The policy lasts for an agreed term, the minimum usually being 10 years. A cash sum is paid out at the end of the policy term (on maturity), or in the event of the earlier death of a policyholder, either a predetermined sum (in the event of death) or a capital sum on maturity, the size of which depends on investment growth during the term of the plan.

Equity ISA

See "Investment ISA".

F

Financial Services Compensation Scheme (Back to Top)

The UK protection scheme for savers. This protects money you have saved with each UK licensed bank, building society or credit union to a maximum of £75,000 per person. It also includes money held in current accounts.

Some banks and building societies share the same banking licence. Where this is the case, your £75,000 protection is across all the companies sharing the licence, not each individual company. Find out which banks and building societies share the same licence.

Please note that investments such as Corporate Bonds, Endowments and Collective Investments have a maximum level of protection of £50,000, not £75,000.

The Financial Services Compensation Scheme does not cover:

  • Money you have loaded onto a prepaid card
  • Money you have lent out using a peer-to-peer website (although if your money is in a savings account awaiting to be lent, this might be covered)

Fixed rate

A fixed rate of interest will pay a set amount on your savings, over a set period. You can get fixed rates of interest paid on cash ISAs, regular savings accounts and savings bonds. Normally if you need to withdraw money from a fixed rate account early, there will be an interest penalty to pay. Some fixed rate bonds will not allow you to withdraw your money at all until the end of the term.

FSCS

See "Financial Services Compensation Scheme".

G

Gross rate (Back to Top)

Gross rate is the rate of interest that you would earn when you take out a savings account, before the deduction of tax. Unlike AER, Gross rates don't take into account the effect of introductory bonuses and compound interest. Although a gross rate can give a rough idea of how accounts match up, AER is a far better way to compare savings accounts. Read more about gross rate. Savings interest is now paid gross and if you need to pay tax you have to declare this to HMRC.

H

Help to Buy: ISA (Back to Top)

These are a type of savings account designed for people to save for their first house deposit. You can pay in up to £200 per month (plus a lump sum of £1,200 in the first month) and the Government will add a bonus of 25% when you buy a house. The bonus is capped at £3,000, so the maximum you should invest is £12,000 in an account, unless the interest rate is better than other types of accounts.

I

Income tax (Back to Top)

See "Taxation of savings interest".

Inflation rate

Inflation is to do with the spending power of money. The cost of things goes up, so you need the spending power of your savings to go up too - preferably by at least the rate of inflation, if not by more. The two key measures of inflation we use in the UK are the Consumer Prices Index and the Retail Prices Index. In order for your savings to keep the same spending power, you need the rate of interest you receive (after tax) to be higher than the rate of inflation, otherwise your savings pot is effectively getting smaller. Read more about inflation.

Inflation-linked bond

A type of structured product. Inflation-linked bonds will pay at least 100% of the growth in inflation over a set term (anything between 3 and 7 years) - commonly using the Retail Prices Index. If you need earlier access to your money, it's possible that you'll come out with less than you originally put in.

Structured products are more complicated than normal savings accounts. Make sure you fully understand and accept the risks you are taking before entering in to any arrangement.

Investment

An investment differs from a savings account in two key ways:

  • Investments can fall as well as rise in value, meaning that you could come out with less money than you originally invested.
  • Investments are usually for a longer term, at least five years. If you need to get at your cash earlier you will probably have to pay penalties (which could again mean that you lose money).

Unlike savings accounts, investments can fall as well as rise in value. Make sure you fully understand the risks you are taking with your money before entering into any arrangement.


Innovative Funding ISA

This type of ISA was launched in April 2016. It allows people who lend money via a peer-to-peer website to earn their interest tax free. You can invest up to the ISA limit of £15,240 in the 2016-17 tax year, provided you have not invested in a cash ISA or Investment ISA in the same year.

Investment ISA

An investment ISA is a tax-efficient way of investing. It is not a type of investment in itself, but a "wrapper" that can go round traditional investments such as shares or funds. You are limited by how much you can pay into an investment ISA per tax year (6 April to the following 5 April). In the 2016-17 tax year this limit is £15,240 (providing you have not put any money into a cash ISA or Innovative Funding ISA).

Investment ISAs can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.


Investment trust

A type of collective investment. The investment trust buys shares in other companies and you in turn buy shares in the investment trust. To "get out" of this investment, you need to sell your shares in the investment trust to another investor.

A key difference between a unit trust/OEIC and an investment trust is that an investment trust can borrow money long term, to take advantage of investment opportunities. However, the ability to earn this greater reward comes with the risk of losing more money should the investment not perform favourably. When selling shares you have in an investment trust, you may have to pay Capital Gains Tax.

Investments can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.


ISA

ISA is short for Individual Savings Account. It is a tax-efficient way of saving and investing. Each person gets an individual ISA allowance each tax year (6 April to the following 5 April) that they can invest up to. If you don't use it in a particular tax year, you can't carry it over - the allowance is lost for that year. It's a way to make your savings and investments grow, without the deduction of tax (some tax may be payable on share dividends in an investment ISA).

ISA allowance (or limit)

This is the maximum amount that you can pay into a cash and/or investment ISA in any one tax year (6 April to the following 5 April).

ISA allowances 2016-17 tax year
Adult ISA £15,240
Junior ISA £4,080

16 and 17-year-olds can benefit from having a £4,080 Junior ISA allowance, as well as a cash ISA allowance of £15,240!

ISA transfer

The ISA rules state that you should always be able to transfer out of a cash or investment ISA. However, some ISAs may have penalties for you transferring away, so check with your existing ISA provider before starting the transfer process.

There is a strict process to follow, so don't close or withdraw money from your ISA.

The transfer should take no longer than 15 working days. Read more about ISA transfers.

J

JISA (Back to Top)

See "Junior ISA".

Junior ISA

Junior ISAs were launched in November 2011 to replace the Child Trust Fund scheme. They are open to children who are under the age of 18, who were born before 1 September 2002, or after 2 January 2011. You can hold cash and/or investments in a Junior ISA, up to the maximum allowance of £4,080.

L

Linked account (Back to Top)

Some savings accounts require you to open (or already have) another savings or current account. Depending on the particulars of the deal, you may also be required to pay money into the linked account.

Moneyfacts.co.uk best buys do not include savings accounts that require you to open a linked account that you have to pay into. However, we do include these in our whole market savings search.

Life assurance bonds

A type of collective investment that is part investment, part life insurance. Usually paid for by a single payment (or premium), the life insurance element itself is usually quite small, with the larger investment part allowing you to invest in a range of investment funds.

Life assurance bonds can be a tax-efficient way of investing, depending on your circumstances. If in any doubt consult an independent financial adviser for more information.

Investments can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.


Loyalty bonus

A loyalty bonus is a special, higher bonus that a bank or building society offers an existing customer. The bonus could be for an introductory period and/or could be dependent on the customer not making a certain number of withdrawals.

If the savings account is available to new customers too, the bonus on offer will be different for new and existing customers, with existing customers getting a higher rate as a reward for their continued loyalty.

M

Maturity (Back to Top)

This means when a savings bond reaches the end of its term, or matures. Some accounts pay interest on maturity, not every month or year.

Minimum balance (or minimum operating balance)

The minimum balance is the lowest amount you can have in the account before the bank or building society closes it. Often this can differ from the minimum amount required to open the account, but be aware that if you make withdrawals, it could reduce your interest rate (if the account operates on a tiered interest basis).

Monthly interest

Where the interest on your savings is paid monthly. This can usually be paid to a separate account if you use savings interest to supplement your income. Read more about monthly interest savings accounts.

N

National Savings & Investments (Back to Top)

National Savings & Investments (NS&I) is owned by the Government, with 100% of savings guaranteed to be protected by the UK Treasury. Probably most famed for offering Premium Bonds, NS&I offers a range of savings and investments, including ISAs.

Notice period

Notice savings accounts require you to give advance warning of making a withdrawal. The notice you're required to give could be anything from 30 to 180 days, or even more for the longest term accounts. Some providers will let you get at your money earlier in return for you forfeiting an equivalent amount of interest.

O

Offset savings (Back to Top)

An offset mortgage allows you to use your savings to reduce the amount of interest you pay on your mortgage. The effect is that you can either finish your mortgage earlier by having a shorter term, or make lower monthly payments. Find out more information in our offset mortgage guide.

OEIC

See "Open Ended Investment Company".

On maturity interest

Where interest is paid at the end of a variable or fixed rate bond term.

Open Ended Investment Company (OEIC)

A type of collective investment. An OEIC, like an investment trust, is also a limited company that invests in other companies. As with an investment trust, you buy shares in the OEIC; however, unlike an investment trust, an OEIC has an unlimited number of shares, allowing you to buy as many as you wish. An OEIC can only borrow money for a short term, so can't take advantage of investment opportunities like an investment trust can. When cashing in shares from an OEIC, you may have to pay Capital Gains Tax.

Investments can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.

Over-50s savings accounts

Savings accounts aimed specifically at more mature savers. Despite the exclusive audience, these accounts don't always pay the best rates available. So be sure to compare with generally available savings accounts too. Read more about savings accounts for over 50s.

P

P2P (Back to Top)

See "Peer-to-peer website".

Paid away interest

Where the interest you earn is paid into another savings or current account, rather than being added to your savings balance.

Pass book

Generally issued by building societies, you'd use a pass book to make withdrawals or to pay into your account. All the transactions are printed into the pass book, giving you a handy, instant reference.

Technological progress has meant that pass books have become less common, as building societies have offered more online savings accounts and more customers choose to manage their finances in this way.

Peer-to-peer website

Peer-to-peer websites let you lend money directly to borrowers for potentially higher returns than you could receive from a savings account. However, peer-to-peer lending does carry an investment risk if your borrowers don't pay back what you've lent to them. Read more about peer-to-peer lending.

Peer-to-peer lending is an investment, so you could come out with less money that you originally invested if the people you lend to can not repay what they've borrowed. Make sure you fully understand the risks you are taking with your money before entering into any arrangement.

Personal Savings Allowance

From April 2016 the first £1,000 of savings interest earned each year is tax free for basic rate tax payers (£500 for higher rate taxpayers and nil for additional rate taxpayers). Savings interest will be paid without deduction of tax, so any tax payable on larger amounts of interest must be declared to HMRC.

Premium Bonds

Premium Bonds are a savings scheme offered by National Savings & Investments. Instead of paying interest, each £1 bond is entered into a monthly draw to win prizes ranging from £25 to £1 million.

Q

Quarterly interest (Back to Top)

Where interest is paid on your savings every three months.

R

Rate guarantee

A rate guarantee is basically an assurance that the interest rate you earn will remain at a minimum level for a set period. It could be as simple as the rate is guaranteed to be at least 3.00% for 12 months. Sometimes the rate guarantee is linked to the Bank of England base rate, so the guarantee might be that the rate will be at least 2.50% above base rate for 12 months instead.

Regular savings accounts

A regular savings account is a specialist type of account, designed to help you building a savings pot, and they will often they pay a higher rate of interest than a normal savings account. However, you will generally have to commit to making a minimum deposit every month. If you miss one of your contributions or make too many withdrawals, you're likely to face stiff interest penalties.

Retail Prices Index

The Retail Prices Index (RPI) is a key measure of inflation used by the Government. It uses a "basket" of goods and services to monitor how the cost of living is going up or going down annually.

In contrast to the other main measure of inflation, the Consumer Prices Index (CPI), RPI includes housing costs such as council tax and mortgage interest.

RPI is calculated using a "arithmetic mean" which basically means that RPI will always give a higher (or equal) figure than CPI, which is calculated using a "geometric mean". Read more about inflation.

RPI

See "Retail Prices Index".

S

Standing order (Back to Top)

A standing order is an automated payment that you can set up from your current account. It will send a regular payment (normally monthly, quarterly or yearly) to the person or company you wish to pay. In the context of savings accounts, some will let you set up a regular standing order or direct debit to your savings account so you don't have to remember to physically transfer the money yourself.

The main difference between a standing order and a direct debit is that with a standing order you have full control over how much you pay and when. With a direct debit these details can be changed by the person or company you're paying. Read more about standing orders.

Stocks & shares ISA

See "Investment ISA".

Structured products

Structured products are a kind of investment, often marketed towards more cautious investors and savers. They are usually for a fixed term and are linked to the performance of an index - such as a stock market index (like the FTSE 100), or inflation.

Structured products are usually quite complicated so it's important you understand how the investment works - and any risks you are taking with your money.

Products can vary greatly and can have different degrees of risk - it's possible that you could lose some or all of your original investment.

Structured products are more complicated than normal savings accounts. Make sure you fully understand and accept the risks you are taking with your money before entering in to any arrangement.

T

Taxation of savings interest (Back to Top)

Any Interest earned from a savings account over your Personal Savings Allowance is subject to income tax. If you are a taxpayer you would have to pay tax on your savings interest according to your income tax banding. Basic rate taxpayers have to pay tax at 20%. Higher rate and additional rate taxpayers must pay a further 20% or 25% respectively, either through Self Assessment or by contacting HM Revenue & Customs.

Tiered interest

Some savings accounts reward you for having a higher balance by offering tiered rates of interest. This is where a higher rate of interest is offered the more you have in the account.

For example, an account might offer 1.00% interest for balances between £1 and £10K, then 2.20% for balances of £10K or more. The higher interest rate is normally paid on your entire balance - so if you had £10,001 in the account we've just mentioned, you'd earn 2.20% on the whole lot, not just the £1 that's above £10K.

Tracker bonds (Back to Top)

A tracker bond is a type of savings account where the interest rate follows (tracks) the movements of another rate - most commonly the Bank of England base rate. This means that your savings interest rate can go down as well as up.

Because it is a bond you will normally have to keep your money in the account for a set term. You may not be able to get earlier access to your funds and, if you can, you will probably have to forfeit some interest for that privilege.

U

Unit trust (Back to Top)

A type of collective investment. Unit trusts allow you to invest an initial lump sum, or regular contributions, or a combination of the two. The trust is divided into units; each unit is worth an equal fraction of the total assets that the trust owns. As the value of these assets increase (or decrease), so does the value of your units. You can purchase more units if you want to.

Unlike Open Ended Investment Companies and Investment Trusts, Unit Trusts may be 'dual priced' where those selling units get a lower price than those buying have to pay.

Investments can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.

W

With profits investments (Back to Top)

"With profits" refers to the way the investment grows. In a with profits scheme you share in the profits of the issuing company. Each year you are normally paid a bonus on your investment (although there is no obligation for a bonus to be paid if the company has not done so well).

Companies that operate a with profits scheme may keep back some profits in a good year, so that they can pay bonuses in years that aren't so good. This process is called smoothing. There may also be an end, or terminal bonus paid when the investment matures.

Investments can fall as well as rise in value. Make sure you fully understand and accept the risk you are taking before entering into any arrangement.

Y

Yearly interest (Back to Top)

See "Annual interest".

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