Make sure you’re savvy when it comes to choosing your savings account with our glossary of terms
Savings rates are generally low at the moment but it’s still important to keep putting money away for a rainy day. But how do you know which is the right kind of account for you? With all the jargon it can be confusing. Here Jasmine Birtles of Moneymagpie.com explains all the important terms you need to know…
AER
AER stands for Annual Equivalent Rate. This figure refers to the yearly rate of interest you will earn from money deposited into a savings account. It’s not just about the interest rate (the APR) but it also takes into account how often interest is added to your account. So if you get interest added every month you’re going to make more in the long-run than if you had it added once a year.
Bank of England base rate
The Bank of England lends money to the high street banks and other institutions and they charge interest on those loans. This is called the Bank of England base rate. This figure is important because it has a knock-on effect on the amount of interest your bank can pay you on your savings and loans. The Bank tends to put rates up when it wants to stop people spending so much and puts it down when it wants to boost the economy.
Cash ISA
A cash ISA is like having a savings account where you don’t have to pay tax on the interest you make. Every UK resident over 16 can have a Cash ISA. Currently you can put up to £5,340 per tax year (that’s April 6th-April 5th) into a Cash ISA. Each year you can either add money to the ISA you have already or set up a new one. However, if you take money out of an ISA you can’t put it back in unless you haven’t reached your ISA limit for that year.
Gross interest and Net interest
When you put money in a savings account you get paid interest on it and the gross figure refers to the amount you get before tax is taken out. Interest on savings accounts is taxed at 20% so when you look at the ‘gross’ figure you should remember that you won’t get all of that in interest. If, for example, the gross interest rate is 5%, in reality, once the tax is taken off, you will only get 4%.
Net interest is the amount you’re left with after tax (20%) has been deducted from the gross. So if you have £100 in an account that gives 5% gross interest, the net will be 4% so instead of getting £5 on your savings you will get £4 at the end of the year.
Index-linked savings bonds
These are savings accounts which, instead of having a rate of interest set by the bank, are linked to an ‘index’, such as the Retail Price Index (which is a measure of inflation - the rising cost of living). An index-linked savings bond usually pays interest at the rate of inflation plus a small percentage. These are often good accounts to invest in when inflation is high.
Instant access account
This is a savings account that pays you interest on the money you deposit whilst giving you the freedom to withdraw your cash whenever you need to (some savings accounts require you to give notice before withdrawing money). Usually the savings rates on these accounts are on the low end because you pay for the flexibility.
Introductory bonus rate
These are offered by many banks as an incentive to open a savings account with them. For a limited period – say six months – you’ll receive a higher rate of interest on your savings than the normal rate they offer. After the introductory period ends, you’ll receive the standard rate of interest. It’s important to keep on top of these rates so that you can move your money to a better-paying account if necessary.
Savings bond
A savings bond, also called a fixed interest savings account, runs for a set period and offers a guaranteed return for that period. This can be anything from a few months to several years although the norm is 1-5 years. You put in a lump sum at the start of that period and you are not allowed to take the money out until the end. These accounts usually offer better interest rates than more flexible ones.
