Savings jargon buster

Overly complex language means bad results for consumers. Here’s an explanation of the most common terms.

Savings jargon is not just annoying and inconvenient – it can lead to outright financial harm to consumers.

When the wording of these deals is overly complex it leads to consumers not taking them out, or picking the wrong deal for them.

Many contracts for personal financial deals are stuffed full of jargon and can stretch to many thousands of words. It has been found that the average reading age of financial services documents is 16 to 17 years old.

However, according to the National Literacy Trust, 16.4% of adults in England, or 7.1 million people, can be described as having 'very poor literacy skills’.

With that in mind, here is an explanation of the most common savings jargon.

AER

The Annual Equivalent Rate is how much you would make in interest over the course of a year if you deposited money in a savings account and left it there. It takes into account the effects of compounding (receiving interest on the interest already received. See Compound interest). The higher the AER, the greater the return.

BACS

Formerly known as the Bankers' Automated Clearing System, a BACS payment is simply a payment between two UK banks. Direct debits and direct credits are examples of BACS.

Base rate/Bank rate

This is the interest rate banks pay when they borrow money from the Bank of England. This matters to consumers because it is factored into the interest that banks pay with their savings deals, or charge on loans and mortgages.

Cooling-off period

This is a 14-day period after taking out a financial deal during which you can cancel a contract with no penalties.

The Financial Services Regulations 2004 state that you can cancel a contract for a financial product within 14 days of buying it. For pensions and life insurance the timeframe is 30 days. Some savings deals have different rules.

Compound interest

This is a crucial concept for savers. In a nutshell it means the power of ‘interest earning interest’.

If you leave £100 in an account paying 1% interest a year, in the first year you will earn £1. But if you leave that £1 in the account, in the second year you will be earning £1.01 of interest, taking the total to £102.1. After 10 years, even without making any additions to the account, you will have earned £10.46 in interest on your original £100.

Depositor

This word crops up frequently in documents sent out to bank customers, and simply means a person who keeps money at that company.

Expected profit rate

Also known as EPR, this expression crops up in Islamic savings deals. For religious reasons these products cannot pay interest, but can pay a return of profits. This rate is not guaranteed, but that goes both ways, as sometimes Islamic savings products pay more than their advertised EPR.

Financial Services Compensation Scheme (FSCS)

A government-backed watchdog that pays financial services customers back up to £85,000 if a registered company cannot meet claims made against it, for example because it has gone bankrupt.

FPS

No, not feet per second, or frames per second – at least, not in this context. When talking about savings, the Faster Payments Service is a banking initiative that lets you send money electronically between financial firms much quicker.

Gross interest rate

How much interest you will earn on a savings deal before tax and bank charges are taken out. But most savers will not pay tax, as savings rates are currently very low. Basic-rate taxpayers earn £1,000 a year before paying tax, and higher-rate individuals can earn £500.

Introductory bonus

This is a trick banks use to make their new savings deals look more attractive. The way it works is that an advertised interest rate of 1% may have two parts – the ‘actual’ rate of, say, 0.5%, plus a 0.5% ‘introductory bonus’. After a set time, usually a year, the saver’s interest rate will halve unless they switch deals.

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ISA

‘Individual savings accounts’ are savings deals where you don’t pay tax on the returns you make. They come in two forms – cash ISAs and stocks and shares ones, and you cannot put more than £20,000 into an ISA in one tax year.

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Minimum lodgement

A strange way of describing the minimum amount of money you can put into a savings account under the terms of the deal.

Nominee

A person you appoint who is allowed access to a savings account should you pass away.

Passbook

A physical book given to savers and used to record the deposits and withdrawals of a current account or savings account. These are slowly dying out as many providers move online, but are still issued for many accounts opened in a physical branch.

PSA

Or ‘personal savings allowance’ is the amount of interest on savings you can earn tax-free.

Reversion rate

This phrase has a sting in the tail when it comes to savings.

Many savings providers say an attractive deal will ‘revert’ to a lower interest rate at the end of a fixed timeframe. Technically (and grammatically) speaking that is an inaccurate use of the word. But it is now a feature of the savings market and worth being aware of.

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RPI/CPI

Or ‘retail price index’ and ‘consumer price index’, these are rival ways of measuring inflation. The main point for savers is that RPI is typically about 1% higher than CPI.

Therefore, be aware that when financial companies want to increase a charge to you in line with inflation, many will choose RPI. When they need to pay you more in line with inflation, they may choose CPI.

Tiered interest

Many savings deals will pay varying interest depending on how much cash you have in the account.

Withdrawal charge

This is a fee savings firms can charge for taking cash out of a savings deal. Often it is the loss of any interest built up on the account, but can be more. For example, taking money out of a Lifetime ISA (apart from to buy a house or fund retirement) has a 25% charge, reduced to 20% for the period between 6 March 2020 and 5 April 2021.