Key Savings Definitions You Should Know

The world of savings can seem overwhelming with its financial terminology. This article aims to break down some of the savings’ definitions to help you navigate different accounts, interest rates, and tax benefits. Whether you’re considering opening a savings account, exploring tax-free options or learning about different interest rate structures, this article could provide some clarity on the key terms.

AER

AER stands for annual equivalent rate. It shows the interest your savings might earn over a year, as a percentage of your balance.

Unlike gross interest, AER takes into account any fees and bonuses that may apply. It also considers the impact of compound interest, which is the interest you earn on your original savings as well as the interest you’ve already earned.

Gross

The gross rate is the amount of interest you’ll receive before any tax or other charges are deducted. Any interest earned on your savings is typically paid gross, with the basic taxpayer able to earn up to £1,000 in interest before needing to pay tax under the Personal Savings Allowance (PSA).

Tax free

Any interest earned on your savings will not be subject to income tax.

Individual Savings Account (ISAs)

Unlike standard savings accounts, ISAs allow you to earn interest free from tax on up to £20,000 per tax year. There are several types of ISAs, including Cash ISAs, Stocks & Shares ISAs, and Lifetime ISAs – each with different features.

Nominated account

Often, when you open a savings account, you’ll be asked to provide details of a nominated bank account. This is the account you use to make payments in and out, and it must be a UK current account. It’s a useful security measure, as it reduces the risk of criminals accessing your account and diverting funds.

BACs payment

BACS stands for Bankers’ Automated Clearing System. It’s a regulated payment system and is one of the most common ways that money is sent and received between banks.

There are two types of BACS transactions:

1. Direct Debit

   You give permission for a company to automatically take payments from your account on an agreed schedule e.g. mortgage payments, utility bills or council tax.

2. Direct Credit

   Money is paid into your account by a third party e.g. salaries, pensions and expenses.

Faster payments

A near-immediate and secure electronic system for transferring sums of money between UK bank accounts. It’s particularly useful for urgent payments, as transfers can be completed in just a few hours or even seconds, depending on the banks involved.

Monthly interest

Some savings accounts pay interest on a monthly basis, usually on a day of your choice, rather than annually. The interest earned can either be added to the account balance or paid directly into a nominated account.

Annual interest

The amount of interest earned over the course of one year. If the interest is compounded, it’s calculated on both the initial deposit and any previously earned interest. Annual interest rates are often used to compare different accounts, as they give a clear picture of how much a saver can expect to earn over a year.

Cooling off period

When you take out certain financial products, providers are legally required to offer a window of time during which you can change your mind. This is known as a ‘cooling off period’ and usually lasts 14 days. If you decide to cancel your agreement during this time, you won’t be charged any penalties.

Variable interest

Variable interest rates can change over time, depending on market conditions or the Bank of England’s base rate. Unlike a fixed interest rate, which stays the same throughout the term, a variable rate may increase or decrease, meaning the amount of interest you earn could fluctuate. This can be beneficial if interest rates rise, but it also means your savings could earn less if rates fall.

Fixed interest

Unlike variable interest rates, fixed interest rates do not fluctuate and remain constant for the whole term of the financial agreement. This means that you receive a guaranteed return on your savings. However, this stability and predictability can come at a cost, as many fixed-term products feature higher initial rates compared to variable rate products.

Deposit

A deposit is money placed into a bank account or financial product, such as a savings account or investment. The deposit earns interest over time, and the bank may use the money to provide loans to other customers. The size and type of deposit can influence the interest rate and returns you receive. Some savings providers might also set a minimum deposit required to open an account.

Compounded interest

This is when interest is earned on the initial amount of money saved, as well as the interest that has already been earned. It creates a snowball effect whereby money in the account grows over time due to interest, even if no money is deposited.

FSCS

The Financial Services Compensation Scheme (FSCS) protects customers from losing some or all of their money saved with UK authorised financial services firms. It protects up to £85,000 of savings per individual, per financial institution.

BBR

The Bank Base Rate is the interest rate at which the Bank of England lends money to commercial banks. It’s a benchmark for various financial products and impacts what borrowers pay as well as what savers earn. It's reviewed several times a year by the Bank of England's Monetary Policy Committee and can go up or down.