Stop the Jargon! We explain savings terms
This stands for Annual Equivalent Rate and is supposed to help you to compare different savings accounts. For example if you have an account that pays a straightforward interest rate of 3%, assuming that interest rates don’t change, if you held the same amount of money for a full year, 3% is how much you would earn. However, if the 3% includes a bonus of 1% for six months, if you hold the money for the full year, you would earn less that 3%, in this case 2.5%. So if you are unlikely to move your money when the bonus ends, in this example you would be better off with the first account, paying 3% gross/AER. The second account pays 3% gross but only 2.5% AER.
- Affinity Account
These are savings accounts which pay an annual donation to a club or charity, such as a football club or local hospice. The rates on these accounts are rarely competitive.
- Base Rate – AKA Bank of England Bank Rate
This is the official UK rate of interest which is agreed on a monthly basis the Monetary Policy Committee of the Bank of England. It’s important to keep an eye on the base rate as often savings rates will move at the same time – although not necessarily to the same extent.
- Basis Point
Basically it means 0.01%
Banking Code of Standards Board
- Best Buys
At SavingsChampion.co.uk, these are the savings account that we feel are the best currently available. You’ll often find reference to best buys in the press – in general they are the best accounts available.
This is a temporary additional rate of interest that is used to boost the underlying rate of interest on a savings account. The time for which the bonus applies will vary from a short period, sometimes perhaps just a matter of days, to 12 months or more. It’s important to check how long any bonus will apply before you choose an account.
- Child Trust Fund (CTF)
This was a savings plan for introduced for all babies born after x/x/2002. They were all given a voucher worth £250 at birth, with a further voucher to be gifted at age 7.
- Compound Interest
This is what happens to interest that is reinvested. In effect, the interest earns interest itself and can have a great positive effect on savings, especially over the long term.
- Deducted at Source
This refers to tax that has been deducted before the saver receives the interest. Most savings accounts will automatically deduct the basic rate of tax at source so unless you are a non, higher or additional tax payer, there is nothing further for you to do with regard to the tax owed on your savings accounts.
- Financial Services Compensation Scheme (FSCS)
This provides protection on your savings accounts in the event that a bank or building society goes bust. The Financial Services Compensation Scheme (FSCS) now automatically covers firms authorised by the Financial Services Authority (FSA) and protects a total of £85,000 per person, per bank licence.
- Fixed Rate
This means that the rate of interest will not fluctuate, but will remain fixed for a predetermined amount of time. This should not be mistaken for fixed term, which means that the account will run for a fixed amount of time but the interest rate may be foxed or variable.
- Form R85
Non taxpayers can receive interest from their savings account without the deduction of tax as long as they complete a form R85. These are available from the savings providers.
- Gross Rate
This is the initial rate paid, before any tax is deducted. The gross rate will include any bonus that applies at that moment, so it’s important to also check the AER.
- ICB – Independent Commission on Banking
On 16 June 2010, the Chancellor of the Exchequer announced the creation of the Independent Commission on Banking, chaired by Sir John Vickers. The Commission has been asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the Government by the end of September 2011 (see terms of reference). The Commission has confirmed that its final report will be released on 12 September.
- Index Linked
Index Linked refers to being linked to inflation.
A word used to explain words that no-one understands! Ironic eh!!
- LIBOR, or the London Inter Bank Offered Rate, is the average interest rate that leading banks in London charge when lending to other banks. Banks borrow money for one day, one month, two months, six months, one year, etc., and they pay interest to their lenders based on certain rates. The Libor figure is an average of these rates.
- Money Markets
These are the rates that banks lend to each other and therefore determines how much providers charge borrowers and pay savers.
- Net Rate
This is the interest rate which is paid after tax has been deducted. It can be referred to as net of basic rate tax, higher rate or additional rate. Savings accounts will normally pay interest with the basic rate of tax deducted. Non tax payers can either reclaim this tax, or they can complete a form R85 to have the interest paid to them without tax deducted. Higher and Additional Rate tax payers must pay the difference between basic rate tax and the level of tax that they pay.
- Operating balance
This may be less than the opening balance but the account will still operate. Fall below the operating balance and the account will be closed and/or switched to another account paying a lower rate.
- Packaged Accounts
Normally this applies to current accounts. These are accounts that offer extras such as travel insurance but there will normally be a monthly or annual charge to use these accounts, so it’s important to check that you would use these added extras.
- Silver Saver/Surfer
Savers over the age of 50 are often referred to as silver savers, as a number of savings accounts have been specifically provided for this age group. Silver surfers are those who use the internet.
- Starting Rate for Savings
From 2008-09 there is a 10 per cent starting rate for savings income only. If your non-savings income is above this limit then the 10 per cent starting rate for savings will not apply.
- TESSA (Tax Exempt Special Savings Account)
TESSAs were introduced by the Government in 1990 ad were the precursor to ISAs. The TESSA was a five year investment with a maximum of £9,000 invested over the full term. When ISAs were introduced in 1999, TESSAs were allowed to run to the end of their term and then it was possible to roll over the proceeds into the cash element of the ISA.
Sometimes savings accounts will pay higher rates of interest for larger sums invested and these levels at which the rate changes is known as a tier.
- Variable Rate
The interest rate can alter without notice on variable rate accounts, and this can be up or down. It’s important to keep an eye on variable savings rates, and consider switching accounts if the rate becomes uncompetitive.