Savings 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!
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.
Where savings interest is paid on the yearly anniversary of you taking out the account.
Where interest is paid on your savings every year, on a set date.
See “Electronic payments”.
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.
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.
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 then if you gave no such assurances. You generally can’t get at your money early with a bond, although recently some providers will allow access at the expense of an interest penalty (this is more the case with longer term than shorter term bonds).
An introductory bonus is usually offered on easy access savings accounts or easy access cash ISAs. The bonus forms part of the initial interest rate and generally last for 12 months. When the bonus ends the interest rate will reduce – quite considerably in some instances.
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 3.00% if you make less than 4 withdrawals per year, falling to 2.00% if you make more than 4 withdrawals in the year.
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.
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).
See “Capital Gains Tax”.
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 2015-16 tax year (6 April 2015 – 5 April 2016) 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 not able to open a Junior ISA.
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 three types of collective investments: investment trusts, life assurance bonds, OEICs and unit trusts.
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.
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.
CPI is calculated using a “geometric mean” which basically means that CPI will always give a lower (or equal) figure than RPI, which is calculated using an “arithmetic mean”. Read more about inflation.
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 which pays a fixed rate of interest. The company then uses the funds for its business purposes e.g. for new product development or expansion.
See “Consumer Prices Index”.
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, savings accounts (including ISAs), as well as loans. You can only join a credit union if you meet a particular union’s eligibility rules, which could depend on:
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
See “Child Trust Fund".
A deposit is an amount that you pay into a savings account.
The person who pays money into a savings account.
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.
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
If you need to have the use of 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 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 accounts allow withdrawals to be made without notice or an immediate penalty. 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.
There are two types of electronic payment: BACS and CHAPS. Electronic payments have the distinct advantage over cheques as they clear a lot quicker.
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 bond.
See “Investment ISA”.
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:
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.
See “Financial Services Compensation Scheme”.
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 affect 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.
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 £1,000 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.
See “Taxation of savings interest”.
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.
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.
An investment differs from a savings account in two key ways:
This type of ISA is available fom 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 limjit 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.
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 also).
A type of collective investment. It may surprise you to learn that an investment trust is not a trust at all – it’s actually a limited company! 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.
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).
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).
16 and 17-year-olds can benefit from having a £4,080 Junior ISA allowance, as well as by taking out an adult cash ISA with an allowance of £15,240!
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.
The transfer should take no longer than 15 working days. Read more about ISA transfers.
See “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 either hold cash and/or investments in a Junior ISA, up to the maximum allowance of £4,080.
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 too.
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.
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.
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.
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.
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).
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.
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.
Some banks and building societies show a “net rate” of interest – this is the rate that will actually be paid to you, once 20% tax has been deducted. If you are a higher or additional rate taxpayer you will have further tax to pay (see “Taxation of savings interest”). And non-taxpayers should complete form R85 to have their interest paid in full, without the tax deduction.
Notice period 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 fixed rate accounts. Some providers will let you get at your money earlier in return for you forfeiting an equivalent amount of interest.
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.
See “Open Ended Investment Company”.
Where interest is paid at the end of a variable or fixed rate bond term.
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.
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.
See “Peer-to-peer website”.
Where the interest you earn is paid into another savings or current account, rather than being added to your savings balance.
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 seen pass books have become less common, as building societies have offered more online savings accounts. The advent of online banking has also contributed to this decline, with more customers choosing to manage their finances in this way.
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.
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 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.
Where interest is paid on your savings every three months.
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.
A regular savings account is a specialist type of account, designed to get you building a savings pot. Often they pay a higher rate of interest than a normal savings account. However, you will 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.
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.
See “Retail Prices Index”.
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 do it yourself.
The main difference between a standing order and a direct debit is that with a standing order it is you that has 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.
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.
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 the remaining 20% or 25% respectively, either through Self Assessment or by contacting HM Revenue & Customs.
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 3.00% interest for balances between £1 and £10K, then 3.20% 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 3.20% on the whole lot, not just the £1 that’s above £10K.
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.
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.
“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 which 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.
See “Annual interest”.
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