Savings Jargon Buster

Savings terms – top 20

AER

The Annual Equivalent Rate shows what the earnings on your savings would be if interest was paid and compounded once each year. If you have an account that pays interest monthly or quarterly you will only get the full AER rate if you leave the interest in the account for the entire year. Use the AER to compare rates on different accounts and decide which one works best for you.

Bank of England Bank Rate

This is the official UK rate of interest which is set once a month by the Bank of England’s Monetary Policy Committee (MPC). The rate you get from your bank is not automatically linked to the Bank of England base rate but it is worth keeping an eye on it and seeing if your own rate changes. We use the Barclays Bank Base Rate which is currently the same as the Bank of England’s figures.

Child Trust Fund

A savings fund set up by the government for every baby born in the UK before 1 January 2011. For more information please see our full Child Trust Fund guide. Your child will receive a £250 voucher at birth to start their Child Trust Fund and a further payment of £250 when they reach seven years old. That figure doubles if your household income is below the threshold set by the government (£15,575 for 2008/9). Your child is the only person who can access the account and only when they are 18 but you or your family and friends can add further deposits, up to £1,200 a year, to give them a helping hand. The return on your child’s investments is free from income tax and capital gains tax, although the government may change this rule in the future.

Compounding

The process of adding together your savings and the interest you have already earned and calculating the interest on the total sum. The alternative to compound interest is simple interest, where the interest is only paid on the original amount invested, but this is rarely used on savings accounts.

Fixed rate

A rate of interest that is fixed on the day of investment.

Gross pa

The amount of interest paid on an account before the deduction of income tax. Like the AER, you can use the gross pa figure to compare different savings accounts and decide which one works best for you.

Guaranteed equity bond (savings)

A long-term savings account that is linked to a stock market index. Your deposit in a savings GEB is always guaranteed but the final return you get on your investment will vary depending on the performance of the index.

ISA

Individual Savings Accounts are a special tax-free* scheme launched by the Government in 1999 to encourage people to save money. There are two types of ISAs: cash ISAs and investment ISAs (also known as stocks and shares ISAs). A cash ISA is like a normal savings account but, with the added benefit of interest being tax-free. An investment ISA involves your money being invested in the stock market, which means it will rise or fall accordingly. Investments held in an investment ISA are free of UK income and capital gains tax (although, where relevant, tax is paid on any dividend income).

*tax-free indicates that interest is exempt from UK income tax provided all ISA conditions are met. The level and basis of tax can change and the value of tax relief depends on the individual taxpayer.

Instant access account

These accounts allow you to withdraw all or part of your savings either immediately or at short notice. These accounts are best for rainy-day savings but you will get a better return on savings where your money is locked away for a set period, so think carefully about which account is best for your needs.

Interest

The income you receive on the money that you save.

Maturity

The end date of a long-term savings account.

Monthly interest

Most savings accounts will pay interest monthly. For monthly paying interest, the gross p.a. figure will be less than the AER to allow for compounding. For interest paid annually, the gross p.a. figure will be the same as the AER figure.

Net interest rate

'Net' is the interest rate payable after the deduction of lower-rate tax (which may be re-claimed by non-taxpayers).

PA.

Per Annum means every year

R85/R40 tax form

If you don’t pay income tax, you don’t have to pay tax on your savings either. And if you are only paying income tax at the 10% rate, you could be eligible for non-taxable savings too. If you don’t pay tax but have a joint account with a taxpayer, you can still get your share of the interest tax-free.

Fill out an R85 form, available online from the HM Revenue & Customs website

If you don't have access to a printer, you can pick up the R85 form at any of our branches or at your local Post Office or Tax Office.

If you have different accounts with different banks or building societies, you’ll need to give each one a separate form and it’s a good idea to call them a month or so later to make sure they’ve taken action on your form.

Even better, you can claim back the tax you’ve been paying for up to five years as long as you haven’t been paying tax during that period. To do this you’ll need an R40 form, also also available online from HM Revenue & Customs  

If you need any further information, come into one of our branches or give us a call and we’ll be glad to help.

Savings bond

A savings bond is ideal for you if you want a fixed rate of interest for your savings, for a fixed term with no risk to your capital. We have 2 types of savings bond. With our Fixed Rate Savings Bonds, you cannot make withdrawals or deposits until the bond term ends. With our Flexible Bonds, we offer you more flexibility by allowing you access to some of your money. All our savings bonds offer different interest payment options and a choice of terms (subject to availability). For example, monthly interest allows you to receive a regular monthly income from your savings and an end-of-term option means that interest will be added to your original deposit at the end of the bond term

Tax year

In the UK this runs from 6 April to 5 April every year.

Tax-free

Tax-free indicates that interest is exempt from UK income tax, provided all ISA conditions are met. The level and basis of tax can change and the value of tax relief depends on the individual tax payer. If you're opening a savings account for your child, ask for the Revenue & Customs R85 form to complete when the account is opened or take one with you. Once we get a completed form, we'll pay interest without deducting tax. You can also get a form when you open the account at your local branch. And if you give your child a gift of money that produces more than £100 of gross interest per year, the income will normally be taxed as yours.

Tiered interest rate

As your balance grows the interest rate applicable may increase to a higher rate.

Variable rate

A rate of interest that can go up or down throughout the lifetime of the savings account.