Transcript Slide 1

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GCSE ECONOMICS: UNIT 11
Choosing to Save
Mr Tarn
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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
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Why do people save?
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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
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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”
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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– Fixed-term investment accounts – savings cannot be withdrawn for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
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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.
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Restrictions from the government
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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
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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
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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
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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)
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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
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Over to you...
• Open and compete the document called...
“Savings questions”
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Extension Task
• Open and compete the document called...
“Extension Task”