Financial literacy is key to helping you manage your money in today’s complex financial world. Understanding how savings accounts operate empowers you to make informed decisions and choose the best options for your financial goals.
There are a large variety of savings accounts available in the market, so to help you understand the differences, Recognise Bank has produced a glossary to clearly explain common terminology to help you confidently approach your savings strategy.
Key savings terms explained
All About Interest
Annual Equivalent Rate (AER)
The annual equivalent rate (AER) shows the interest on a savings account as if it’s compounded periodically and paid once a year. This makes it easier to compare different savings accounts accurately, as it reflects the true annual return including the effect of compounding. Essentially, AER helps savers understand how much their money will grow over a year, taking into account the frequency of interest payments.
Compound Interest
Compound interest refers to earning interest on your interest. For your savings, it means you earn interest not just on the initial amount you put in, but also on the interest that accumulates over time. This can significantly increase your savings, especially over long periods. It’s a powerful way to build wealth, as the interest you earn each period is added to your original amount, creating a cycle of earning interest on interest.
Gross Rate
The gross rate on a savings account is the interest rate before taxes are taken out. It shows how much your money will grow in a year without considering any deductions like income tax. This rate gives you a clear picture of the maximum potential growth of your savings, helping you to compare different accounts and understand their returns. However, remember the actual amount you’ll receive could be less once tax is applied, depending on your personal tax situation.
Monthly Interest
Monthly interest on savings accounts means you earn interest on your deposited money every month. This approach allows the interest you’ve earned to also start earning interest in subsequent months, benefiting from the compounding effect. Choosing a savings account that pays interest monthly can be especially beneficial if you’re looking to generate a regular income from your savings or simply want to see your savings grow consistently.
Tax-Free Interest
Tax-free interest means the interest you earn on savings or investments is not subject to income tax. This makes your earnings grow faster because the government doesn’t take a portion of the interest you earn. Accounts like ISAs (individual savings accounts) in the UK offer this benefit, allowing you to save or invest up to a certain amount each year without paying tax on the interest or returns. This is especially beneficial for long-term savers and investors, as the compound interest builds up over time, increasing the overall return on your savings or investments without the deduction of taxes.
All About Accounts
FSCS (Financial Services Compensation Scheme)
The Financial Services Compensation Scheme (FSCS) protects UK customers of authorised financial services firms. If a bank, building society, or other financial institution that is covered by the FSCS fails, the FSCS can compensate customers up to a certain limit. For savings, the compensation limit is £85,000 per person, per institution and up to £170,000 for joint accounts. This means if your bank were to become insolvent, you could claim up to £85,000 of your savings. The FSCS covers a wide range of financial products, including deposits, investments, insurance policies, and mortgages, ensuring that consumers have a level of protection against the bankruptcy of financial institutions.
Deposit
A deposit is a sum of money held in a savings account, usually with a Bank or Building Society. At Recognise Bank, you can make deposits via Faster Payment or CHAPS Payments. You can make a deposit into your savings account electronically via your Nominated UK Bank Account. Your Nominated UK Bank Account is the current account from which you transferred money into your Recognise savings account.
Faster Payment
A Faster Payment is a quick and secure way to transfer money between bank accounts. It’s known for its speed, typically transferring funds almost instantly. Unlike a CHAPs payment, there are often limits placed on the amount of money you can transfer via this method. Typically, this is £25,000 for personal and £1 million for business transactions.
CHAPS Payment
CHAPS stands for Clearing House Automated Payment System. CHAPS payments are characterised by being high value. There are often limits placed on the amount of money you can transfer via this method. Typically, this is £25,000 for personal and £1 million for business transactions.
Easy/Instant Access Accounts
Easy or instant access accounts are a type of savings account that let you withdraw your money without facing penalties, making them ideal for saving funds you might need access to quickly. These accounts offer the flexibility to deposit and withdraw cash at short notice, which is perfect for emergency funds or saving for short-term goals. While they provide great convenience and accessibility, the interest rates might be lower compared to other savings accounts that restrict access to funds. They strike a balance between earning some interest on your savings while keeping your money readily available.
Fixed Interest Rate
A fixed rate in savings accounts means the interest you earn on your money stays the same for a set period. This guarantees your savings will grow at a predictable rate, unaffected by changes in the broader economy. Opting for a fixed rate can be appealing if you’re looking for stability and certainty in how much interest your savings will earn, making it easier to plan for future financial goals.
Variable Interest Rate
A variable rate on savings accounts means the interest rate can change over time based on decisions by the bank or changes in the broader economy. This could mean your savings earn more interest when rates go up but also less when they drop. It offers flexibility and the potential for higher returns in a rising interest rate environment but comes with the uncertainty of fluctuating earnings.
Notice Savings Accounts
Notice savings accounts require you to give a set period of notice before you can withdraw your funds. This kind of account strikes a balance between accessibility and higher interest rates compared to easy access accounts. By agreeing to notify the bank in advance of withdrawals, you often earn a better interest rate, making your savings grow faster. These accounts are suited for those who want to plan their finances in advance and don’t need immediate access to their money, providing a higher return for a slight delay in accessibility.
