SECTION 1MONEY

£££ £

£

£

Choosing to Save

Mr Tarn

GCSE ECONOMICS: UNIT 11

SECTION 1MONEY

£££ £

£

£

Aims of today’s lesson …

• Understand why people save

• Understand interest rates and why they differ between accounts

• Understand the relationship between risk and potential reward and spreading risk

SECTION 1MONEY

£££ £

£

£

Why do people save?

SECTION 1MONEY

£££ £

£

£

Methods of saving

• If someone is in a position to save (i.e. their net income after tax is higher than their regular outgoings), they have a wide selection of places where they can deposit money.

• These include:– High-street banks (such as NatWest and HSBC) and building societies

(like West Bromwich or Derbyshire)– Internet-only banks (such as Smile, Cahoot)– National Savings and Investments– Post Office card account – a simple account mainly for pensioners or

those receiving benefits; it only allows you to withdraw cash using the card. You cannot go overdrawn, but you won’t get any charges

SECTION 1MONEY

£££ £

£

£

Current Account V Savings Account

• Money (i.e. wages from employment) tends to be paid directly into a person’s Current Account before being transferred into a Savings Account, like the ones mentioned

• However what is the difference between a Current & Savings Account?

• Open and complete the activity called “Current & Savings Account Research tasks”

SECTION 1MONEY

£££ £

£

£

Types of saving accounts

• There are many different types of account within each of the main savings institutions:– Savings accounts and Individual Savings Accounts (ISAs) – savings on

which interest payments are tax free– Fixed-term investment accounts – savings cannot be withdrawn for

an agreed length of time (term)– Share-based savings (e.g. unit trusts) – these are savings products

that spread risk by investing in a range of shares– Government securities – bonds issued by the government through

National Savings and Investments

SECTION 1MONEY

£££ £

£

£

Restrictions from the government

• Unfortunately, the government charges tax on interest from all savings accounts apart from ISAs

• You will often see savings interest rates advertised as ‘gross’ or ‘net’.– Gross interest is the interest rate before tax has been deducted. – Net interest is the rate you receive after tax has been taken off.

SECTION 1MONEY

£££ £

£

£

Restrictions from the government

Account Reward Risk Short-, medium- or long-term Ease of withdrawing money

Savings accounts Low–medium Low Short–longEasy – unless notice of withdrawal is required

ISA accounts Low–medium Low Medium–long Easy

National Savings and Investment account Low Very low Medium–long

Often requires written notice of withdrawal

Unit trusts Medium–high Medium-high LongObtaining your money may take some time

SECTION 1MONEY

£££ £

£

£

Interest Rates on savings accounts

• The table on the previous slide shows that the rate of interest obtained on savings partly depends on the length of time the money is tied up (the ‘term’)

• Generally, if you can leave your money longer, you will get a higher rate of interest (a higher return) – though this is not always the case

• You can also obtain higher rates of interest if you save larger amounts or if you have to give notice, which means telling the bank in advance that you wish to withdraw your savings

SECTION 1MONEY

£££ £

£

£

Interest Rates on savings accounts

• The table below shows an internet comparison of savings accounts from December 2008

• The lower running costs of internet-only accounts mean that these offer higher interest

• However not everyone will want to use these online accounts, believing that they are less safe or secure than going to their local bank or building society.

Provider Type of account

AER Notice Interest paid

Minimum balance

AA Internet saver

6.46% Instant Monthly £1

Alliance and Leicester

Online tracker

4.75% Instant Annually £1

SECTION 1MONEY

£££ £

£

£

Interest Rates on savings accounts

• The table below shows that by saving regular amounts every month or saving money for a fixed term, you usually get a higher interest rate

• In the latter case, you get a guaranteed interest rate for the length of the term

• These are suitable for people who do not need access to their money for the length of the term

Provider Account AER Duration Interest paid Minimum balance

Halifax International regular saver

8% Fixed tern for 1 yr

On maturity £100

ICICI bank 2-year HiSave (Fixed rate)

5.42% Fixed term for 2 yrs

Annually £1

SECTION 1MONEY

£££ £

£

£

Annual Equivalent Rate (AER)

• The savings accounts mentioned all quote the Annual Equivalent Rate (AER) of interest

• An AER is given so that the interest rate on different savings accounts can be accurately compared

• It shows what the interest rate would be if interest was paid and compounded once each year

• For example, on some accounts interest is added each month (such as seen for the AA Internet Saver account).

• In this case you would get interest being earned on interest throughout the year; this is known as compounding (when interest is earned on interest already received)

SECTION 1MONEY

£££ £

£

£

Annual Equivalent Rate (AER)

• As a result of compounding, the total amount of interest you receive in one year would be higher if credited monthly than if calculated only once, at the end of the year.

• The AER converts the monthly rate into a figure equivalent to the annual rate

• The AER also removes the effect of any temporary promotional offers, that disappear within a few months, but which distort ‘Best Buy’ comparison tables

SECTION 1MONEY

£££ £

£

£

Over to you...

• Open and compete the document called...

“Savings questions”

SECTION 1MONEY

£££ £

£

£

Extension Task

• Open and compete the document called...

“Extension Task”