Topic 5 - Savings

Question 1

What are reasons for saving?

Answer 1

• needs: to pay for a deposit on a property
• wants: something that would be nice to have
• aspirations: good or services to enjoy in future
• precautionary: in case of an unexpected event

Question 2

Key consideration when choosing a savings product

Answer 2

• rate of return
• how often money can be withdrawn
• how regularly I want to save
• is the rate > inflation (real interest rate +?)
• is the interest my savings earn taxed
• are the savings safe

Question 3

Return on savings

Answer 3

• return: interest on savings (expresses as AER)
• AER: interest earned on money in 1yr (decided by provider)
• takes into account: fees, changes w account, how often interest is paid (monthly/annually)

Question 4

Factors making return on savings higher

Answer 4

• large sums of money
• saving specific amount each month
• the longer the savings are held (longer saving bonds)
• account w restricted access (certain number of withdrawals)
• introductory bonus rate

Question 5

Impacts of inflation

Answer 5

• inflation: sustained inc in general price level
• dec purchasing power of money/savings: real interest rate must be + for savings to gain value
• measured by: RPI (retail price index) includes mortgage interest payments, CPI (consumer price index) the measure Bank of England use for their target rate of inflation

Question 6

ISAs (Individual savings accounts)

Answer 6

• some accounts have no tax
• interest paid free of tex
• money can be invested in cash ISAs (>16yrs) or stocks + shares ISAs (>18yrs)
• savers can contribute to only 1 cash ISA and/or stocks + shares ISA in a tax yr (limit = £20,000/yr)
• max. amount deposited into an ISA in only 1 tax yr can be split between cash + stocks + shares
• savers can transfer funds between ISAs depending on terms of both ISAs

Question 7

Junior ISAs

Answer 7

• available for <18s (parents open accounts for <16s)
• can’t withdraw funds until 18
• only available to those w/o a CTF
• savings can’t exceed £9,000 for 2022/23

Question 8

Help to buy ISAs

Answer 8

• 1st time buyers can save up to £200/month towards their 1st home + gov. boost their account by 25% when the account is closed
• max. bonus is £3000
• accounts are for individuals

Question 9

Lifetime ISAs

Answer 9

• for anyone >18 + <40
• up to £4,000 can be saved each yr until reaching 50 (gov. will add bonus of 25%)
• money for buying home or use in retirement
• money withdrawn before 60 w/o buying 1st home = gov. bonus lost

Question 10

Safety

Answer 10

• FSCS guarantees £85,000 of savings in UK banks
• National savings + investments (NS&I) guaranteed by Her Majesty’s Treasury so 100% savings guaranteed
• stocks + shares more risky as value can go down as well as up