Jargon Buster: savings…. ISAs
The financial world is full of so many words and there are as many savings tips as their are abbreviated and hard to decipher phrases. We have produced this jargon buster to lend you a hand.The jargons are mostly specific to saving and investment terms. For Mortgage, jargon busters see here.
ISA (Individual Savings Account)
A savings account which is not taxed by the government.The government sets a limit on the amount of money you can save in any one tax year. The tax year runs from 6 April one year until 5 April the following year.For first time buyers the Help to Buy ISA guide might be more specific.
Junior ISAs can be open from the age of 16, otherwise a person with parental responsibility can do it. They are available to those who are under the age of 18 and do not have a Child trust fund.
The day when an account reaches the end of its term.
A type of collective investment. Unit trusts allow you to invest an initial lump sum, or regular contributions, or a combination of the two. The trust is divided into units; each unit is worth an equal fraction of the total assets that the trust owns. As the value of these assets increases (or decreases), so does the value of your units. You can purchase more units if you want to.
Unlike Open Ended Investment Companies and Investment Trusts, Unit Trusts may be ‘dual priced’ where those selling units get a lower price than those buying have to pay.
With profits investments
“With profits” refers to the way the investment grows. In a with profits scheme you share in the profits of the issuing company. Each year you are normally paid a bonus on your investment (although there is no obligation for a bonus to be paid if the company has not done so well).
Companies that operate a with profits scheme may keep back some profits in a good year, so that they can pay bonuses in years that aren’t so good. This process is called smoothing. There may also be an end or terminal bonus paid when the investment matures.
A tracker bond is a type of savings account where the interest rate follows (tracks) the movements of another rate – most commonly the bank of England base rate. This means that your savings interest rate can go down as well as up.
You will normally have to keep your money in the account for a set term. You may not be able to get earlier access to your funds and, if you can, you will probably have to forfeit some interest for that privilege.
Taxation of savings interest
Any interest earned from a savings account over your Personal Savings Allowance is subject to income tax. If you are a taxpayer you would have to pay tax on your savings interest according to your income tax banding. Basic rate taxpayers have to pay tax at 20%. Higher rate and additional rate taxpayers must pay a further 20% or 25% respectively, either through Self Assessment or by contacting HM Revenue & Customs.
Some savings accounts reward you for having a higher balance by offering tiered rates of interest. This is where a higher rate of interest is offered the more you have in the account.
For example, an account might offer 1.00% interest for balances between £1 and £10K, then 2.20% for balances of £10K or more. The higher interest rate is normally paid on your entire balance – so if you had £10,001 in the account we’ve just mentioned, you’d earn 2.20% on the whole lot, not just the £1 that’s above £10K.
Structured products are a kind of investment, often marketed towards more cautious investors and savers. They are usually for a fixed term and are linked to the performance of an index – such as a stock market index (like the FTSE 100), or inflation.
Structured products are usually quite complicated so it’s important you understand how the investment works – and any risks you are taking with your money.
Products can vary greatly and can have different degrees of risk – it’s possible that you could lose some or all of your original investment.
A standing order is an automated payment that you can set up from your current account. It will send a regular payment (normally monthly, quarterly or yearly) to the person or company you wish to pay. In the context of savings accounts, some will let you set up a regular standing order or direct debit to your savings account so you don’t have to remember to physically transfer the money yourself.
The main difference between a standing order and a direct debit is that with a standing order you have full control over how much you pay and when. With a direct debit these details can be changed by the person or company you’re paying.
Retail Prices Index
The Retail Prices Index (RPI) is a key measure of inflation used by the Government. It uses a “basket” of goods and services to monitor how the cost of living is going up or going down annually.
In contrast to the other main measure of inflation, the consumer price index (CPI), RPI includes housing costs such as council tax and mortgage interest.
RPI is calculated using a “arithmetic mean” which basically means that RPI will always give a higher (or equal) figure than CPI, which is calculated using a “geometric mean
Bank of England base rate
By Bank of England Base Rate we mean the Bank of England’s official dealing rate (the Official Bank Rate) as set by the Monetary Policy Committee.
An Individual Savings Account (ISA) is a savings account where you don’t pay tax on the interest you earn. As your earnings are tax-free, this means you get to keep everything that you invest and earn.
There are four different types of ISAs: Cash ISAs which are available to people aged 16 or over, Stocks and Share ISAs and Innovative ISAs which are available to those aged 18 years and over. And Lifetime ISAs available to people aged between 18 – 40.
Cash ISA allowance
Each tax year, everyone aged 16 and over in the UK gets an annual tax-free ISA allowance of £20,000. And the tax year runs from 6 April to 5 April the following year.
With an ISA you can save money as cash (in a cash ISA), invest in the stock market (in a Stocks & Shares ISA), lend your money to other individuals or companies as a loan (in an Innovative ISA), or save towards your first home and/or retirement (in a Lifetime ISA) or any combination of the four. This is based on HM Revenue and Customs UK taxation law and practice which may change.
An ISA, or Individual Savings Account, allows you to invest up to £20,000 each tax year without you having to pay a penny of tax on any interest or gains you make.
You can only subscribe to one of each ISA type, Cash ISA, Stocks & Shares ISA, Innovative Finance ISA and Lifetime ISA (maximum £4,000) in each tax year, up to the combined annual subscription limit of £20,000.
FTSE 100 Index
This stands for the Financial Times Stock Exchange 100 Index, which is made up of the 100 largest firms quoted on the London Stock Exchange.
This is the time you have to give to notify the bank or building society that you want to withdraw your money without paying a penalty. 60 , 90, 120, 180 days are common notice periods.
An annual summary of all your payslips. Your employer gives you one at the end of every tax year, if you still work for the employer. Keep it safe.
Tax year for cash ISAs
A tax year runs from 6 April one year until 5 April the following year. The current ISA subscription limit is £20,000 for the 2017/2018 tax year.
Interest rates offered by banks and financial institutions on loans or deposits which are liable to change according to circumstances. For example, a movement in the Bank of England Base Rate which is set by the Monetary Policy Committee.
AER stands for the Annual Equivalent Rate and shows what the interest rate would be if interest was paid and added to the capital balance each year. The higher the AER, the better the return you will receive.
The interest your money has earned, which is added to your original investment.
With a Flexible ISA, you’ll be able to withdraw money and put it back without affecting your ISA allowance, as long as it’s done in the same tax year and the account remains open.
Interest paid before the deduction of income tax.