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LIBF Unit 1 > 5. Saving Products > Flashcards

5. Saving Products Flashcards

1
Q

Why do people save?

A
  • so they have funds to pay for goods and services in the future
  • saving is ‘delayed spending’
  • they may also want to buy a specific good or service
  • to feel safer -> having money to pay for unexpected expenses
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2
Q

What may future payments be for?

A
  • needs -> such as paying a deposit on a rented flat
  • wants -> items that savers cannot afford on a day-to-day basis, such as a computer
  • aspirations -> goods or services that they would like to have or experience in the future, such as a holiday
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3
Q

Factors considered when choosing a savings product

A
  • the rate of return (how much interest will I earn?)
  • is the rate of return higher than inflation?
  • will I have to pay tax on the interest?
  • how often will I be able to withdraw money?
  • how regularly will I want to save?
  • operating the account online, with a pass book etc
  • how safe will my savings be?
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4
Q

Who provides savings accounts?

A
  • banks
  • building societies
  • credit unions
  • friendly societies
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5
Q

What do providers do with savings accounts?

A

Use the money deposited in savings accounts to lend to borrowers

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6
Q

What contributes to the provider’s income?

A

The difference between the higher interest charged on loans and the lower interest paid on savings

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7
Q

What is the return on savings?

A
  • the interest that the provider pays the account holder
  • expressed as an annual equivalent rate (AER) - such as 2.2% AER
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8
Q

What is the AER?

A
  • the interest that will be earned on the money in one year
    it takes into account:
  • how often the provider pays the interest (e.g. monthly or annually)
  • the effect of compounding the interest and any fees and charges
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9
Q

How is AER calculated?

A
  • using a formula
  • all providers must use the same formula to calculate the AER they quote in advertising so people can compare the return on different saving products
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10
Q

How do providers set the AER?

A

AER on a particular product is set in relation to the Bank of England’s Bank rate and the saving rates offered by other providers in the market

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11
Q

How does the Bank of England use bank rates?

A
  • to control the interest rates that providers offer on both savings and loans
  • thereby to control the rate of inflation
  • the MPC (Monetary Policy Committee) of the Bank of England meets regularly to consider whether to change the bank rate
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12
Q

How has the bank rate changed over the years?

A
  • low level of 0.5% from 2009 to 2016 when it was lowered again to 0.25%
  • increased slight but lowered to 0.1% in 2020 in response to economic shock caused by covid
  • December 2021 it was increased to 0.25%
  • in 1991 the bank rate varied between 10.38% to 13.38%
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13
Q

How does bank rate affect savers?

A
  • a low bank rate means savers receive low returns on their savings
  • the theory is that this will encourage people to spend rather than save to ease recession
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14
Q

How does the amount of money that is saved affect rates of return?

A
  • larger sums of money earn higher rates of return
  • usually a minimum amount has to be deposited in order to open a savers account - can vary from as little as £1 to thousands
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15
Q

The affect of how often money is saved on return rates

A

People can usually achieve higher rates of return on their savings by saving a specific amount each month

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16
Q

The affect of how long the money is saved on return rates

A

The longer the term that the savings are held, the higher the interest rate tends to be

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17
Q

What are instant saving accounts

A

A saver can withdraw money immediately from these at any time without charge

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18
Q

What are notice accounts?

A
  • a saver has to give notice to advise the provider a set amount of time before withdrawing the money
  • notice accounts usually pay higher AERs than instant access accounts
  • failure to give notice usually results in loss of interest earned during notice period - e.g. if the notice period is 90 days, the saver who didn’t give notice would lose 90 days’ worth of interest
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19
Q

What are fixed period accounts or bonds?

A
  • pay a fixed AER for a set period of time, such as 6 months or two years
  • provider may allow only limited withdrawals or no withdrawals during the term
  • usually pay higher AERs than instant accounts and notice accounts with shorter terms
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20
Q

What is the advantage of a fixed period account or bond

A
  • the fixed rate of return means savers know what the AER will be throughout the life of the product
  • products that are instant access or notice accounts usually have varying interest rates that move up and down with changes in the Bank rate - savers are therefore uncertain about how much interest the provider will pay over the long term
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21
Q

How the number of withdrawals varies

A
  • savings accounts called ‘instant access’ or ‘easy access’ allow as many withdrawals as the saver wants
  • ‘restricted access’ accounts only allow a certain number of withdrawals to be made each year
  • ‘restricted access’ accounts usually have higher AER
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22
Q

Affect of account application and operation channels on rate of return

A
  • accounts that the customer applies for and operates online tend to offer higher rates of return than accounts that are operated by a passbook in a branch, or by cash card, telephone or post
  • this is because the customer does most of the administrative work themselves when operating a product online (such as transferring funds between accounts)
  • providers may have to pay the costs of running branches and paying staff for customers who want to go into a branch
23
Q

Affect of tax status of account on return rates

A
  • March 2015 budget -> conservative-lib dem coalition government announced changes to the way that savings interest is taxed
  • the interest earned on the some accounts is tax-free, while on other accounts the saver must pay tax on any interest that exceeds their ‘personal savings allowance’
24
Q

Affect of introductory bonuses on rate of return

A
  • some savings accounts have fixed introductory bonuses that boost the return in the first year of the account
  • people may choose to transfer their savings after one year to an account with a higher return
25
Q

How does inflation affecting savings?

A
  • inflations affects purchasing power of money because £100 in a year buys less than £100 buys todau
  • savers need their money to earn an AER that is the same as the rate of inflation to maintain the purchasing power of their money
  • if AER is higher than inflation, the real value of their savings will grow because it’s purchasing power is increasing
26
Q

What does the Bank of England do?

A
  • tasked with managing inflation to meet the government’s target of 2.0%
  • two indices are used to measure inflation: the Consumer Prices Index (CPI) and the Retail Prices Index (RPI)
27
Q

What is the CPI used for?

A

To measure the inflation rate managed and quoted by the Bank of England

28
Q

How do the CPI and RPI measure inflation?

A
  • by calculating the average change in prices of a basket of goods over a 12 month period
  • the basket of goods used is made up of around 700 consumer goods and services that represent the spending pattern of UK households
  • around 180,000 separate price quotations are used every month from 150 areas of the country —> the prices are then weighted according to the pattern of UK household spending - e.g. if a good represents 10% of an average household’s spending then it is waited as 10% of the basket
29
Q

What is the difference between CPI and RPI

A

RPI includes mortgage interest payments and other own-occupier costs, CPI does not

30
Q

Impact of taxation on savings

A
  • providers pay all interest on saving accounts gross (before tax)
  • savers pay any income tax they owe
  • savers have a ‘personal savings allowance’ for the amount of savings interest they receive before any income tax is charged
31
Q

What is the ‘personal savings allowance’ before income tax is charged?

A
  • £1,000 for basic-rate tax payers
  • £500 for higher-rate taxpayers
  • additional-rate taxpayers don’t receive a personal savings allowance
32
Q

What is the ‘starting rate band’

A
  • savers who earn less than the personal allowance for income tax can use it to earn more interest tax-free
  • they benefit from a ‘starting rate band’ of £5,000 above the personal allowance threshold and so do not pay income tax
33
Q

Does the interest on ISAs have tax?

A
  • interest is payed free of tax
  • the government introduced ISAs in 1999 to encourage people to save - and the AERs tend to be competitive therefore they are popular with savers
34
Q

How can money in ISAs be invested?

A

Cash and/or stocks and shares

35
Q

What are cash ISAs

A
  • available for savers from the age of 16
  • stocks and shares ISAs are available for savers from the age of 18
  • interest on a cash ISA paid income tax free and does not count towards the saver’s personal savings allowance
36
Q

Tax on stock and shares ISAs

A
  • the return on a stocks and shares ISA is paid income tax free where return is in the form of interest
  • where the return is paid in the form of dividends, income tax is payable
  • any growth in the value of the capital invested in a stocks and shares ISA is not subject to capital gains tax
37
Q

Rules with ISAs

A
  • savers are only allowed to contribute to one cash ISA and/or stocks and shares ISA in a tax year
  • there is a maximum amount that can be deposited into an ISA in any one tax year - this amount can be split in any proportion between cash and stock and shares
38
Q

Can savers transfer funds between ISAs?

A
  • savers can transfer funds from a cash ISA into another cash ISA or into a stocks and shares ISA during a tax year
  • they can also transfer funds from one stocks and shares ISA to another stocks and shares ISA, and also to a cash ISA
  • however - transfers depends on the terms of both the original and new ISA - some don’t allow funds to be transferred
39
Q

What are junior ISAs?

A
  • designed for savers under 18 with its own specified deposit limit
  • also pays interest free of tax and offers cash/stocks and shares options
40
Q

Who can have a junior ISA?

A
  • only available to young savers who don’t have a Child Trust Fund (CTF)
  • from 2015 savers with a CTF are able to transfer the funds to a junior ISA if they wish
41
Q

How can a junior ISA be opened?

A
  • parents and guardians with parental responsibility can open a junior ISA for savers who are under 16
  • people aged 16 or 17 can open their own junior ISA
42
Q

Who can pay money into a junior ISA?

A

Anyone can as long as they don’t exceed the deposit limit for the tax year

43
Q

who can withdraw money from the Junior ISA?

A
  • only the child named can withdraw money from the account
  • they can not do this until they are 18 years old
44
Q

What are Help to Buy ISAs

A
  • available from 2015 from a range of banks and building societies
  • first-time buyers can save up to £200 a month towards their first home and the government will boost their savings by 25% when the account is closed - that is a £50 bonus for every £200 saved and all interest earned is tax free
  • first time buyers who save £12,000 in their Help to Buy ISA will be eligible for the maximum government bonus of £3,000
  • accounts are for individuals, so couples can save separately an both receive the government bonus
45
Q

When did Help to Buy ISAs end?

A
  • they were available for new savers until 2019
  • it was then replaced by the Lifetime ISA available since 2017
  • people with a Help to Buy ISA can transfer their savings to a Lifetime ISA if they wish
46
Q

Who are Lifetime ISAs available to?

A

anyone aged over 18 and under 40 can open a Lifetime ISA

47
Q

What are Lifetime ISAs used for?

A

To help buy their first home or to save for their retirement

48
Q

How much can be saved in a Lifetime ISA?

A
  • up to £4,000 can be saved every year until the saver reaches the age of 50
  • the government will add a bonus of 25% of the saver’s contributions at the end of every tax year
  • this means savers who add £4,000 in one tax year will receive a £1,000 bonus
49
Q

When can savers withdraw money from their Lifetime ISA?

A
  • when they buy their first home or when they reach 60 - they keep the government bonus
  • savers who withdraw the money before 60 and who are not buying their first home will pay a 25% withdrawal charge on the total - removing the government bonus
50
Q

Do Lifetime ISAs contributions counts towards the saver’s ISA limit for a tax year

A

Yes

51
Q

How does safety contribute to choosing a savings product?

A
  • one of the reasons people save is to have funds to call on in emergencies and in old age
  • the likelihood of the money saved being available in the future is therefore a key factor when people decide where the save their money
52
Q

What is the Financial Services Compensation Scheme (FSCS)?

A
  • guarantees up to £85,000 of savings in UK banks, building societies or credit unions that are authorised by the UK financial services regulator, the Financial Conduct Authority (FCA)
  • this means if the provider is in default and unable to pay account holders their savings - the FCSC will pay 100% of what is owed up to £85,000 per person per provider
  • the FSCS is an independent body set up under the Financial Services and Markets Act 2000 (FSMA) and makes no charges to savers for using its service
53
Q

What is the National Savings and Investments (NS&I)

A
  • people who want 100% of their savings guaranteed, regardless of amount, can save with the NS&I which is backed by Her Majesty’s Treasury
  • this provider offers a range of savings products including cash ISAs, instant access savings accounts, and long term savings
54
Q

Cash vs stocks and shares

A

stocks and shares savings are much more risky than cash as they gain or lose value according to movements in the stock market, which can be unpredictable

LIBF Unit 1 (14 decks)

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