Beware First Direct ISA

SparciaM wrote: »

It was 6% fixed (until March 2009) last week, but has now dropped to 5.89% fixed (until March 2009).

I'm guessing it's to get people to take out their reg ISA at 7% instead. Not good, as I was going to open last week, but told had to wait till this week to open (as already had an ISA) and now it's dropped.

No it hasn't. The interest rate is, and always has been 5.84% gross fixed to 6 March 2009. The FD ISA pays interest monthly, which as a result of compounding, i.e. interest being paid on interest, means that after 12 months you would have received the equivalent of 6% interest if you had deposited and not withdrawn or added to the ISA since the 6 March 2008. Now as the fixed date has not moved you can only get a maximum of 11 months (well, slightly less now), hence 11 months at the promotional rate and 1 month at the normal rate will result in your total interest over the 12 months being equivalent to 5.89%.

SparciaM,

Quoted AER's are purely illustrative, and indicate what the return would be under a specific set of conditions. You only ever earn interest at the 'gross p.a.' rate. On a normal annual interest account, the AER and gross p.a. rates will be the same. On a normal monthly interest account, the AER and gross p.a. rates will differ. For example, in the case of your FD account, if you were in it for the full year you would indeed earn an AER of 6%...and this would be made up of monthly compounding of your 5.84% gross interest rate.

Because it's not now possible to get a full year of interest, FD are NOT ALLOWED to claim an AER of 6%. However, and this is the crucial bit you're missing, your monthly interest is still paid at the gross p.a.rate of "balance x 5.84% / 365 x n" (where n = number of days in the month), and then capitalises (compounds) going into the next month.

In short, you've moved from an account paying 6% gross p.a to one that pays 6.25% gross p.a. How long will it take you to recover the interest lost whilst your money is in transit? I would suggest a long time...and if the new account is variable, and drops with the recent (and still to come?) BOE cut, then you're actually losing money!!!!!!!

SparciaM wrote: »

isasmurf, u need to recheck things before saying if they are correct or not.

Three people have now posted to try to help you, and when the penny finally drops I think you'll be retracting the above statement.

SparciaM wrote: »

Well according to 5 people at FD, the rate has dropped.

So only 1 can be right. They said that it 'was' 6% and now is 5.89% fixed for 1 year - so if I applied for it, I'd get 5.89% once £1 went into the account, but until that they can guarantee the rate.

So either FD are wrong or people on this forum are wrong. Plus the website would be wrong for having 6% a week ago and now 5.89% this week.

The rate is not fixed for 1 year, it's fixed until 6th March 2009, which is why the attainable AER rate has reduced from 6% to 5.89% and will continue to reduce each month until that date. http://www.firstdirect.com/savings/cash-eisa-overview.shtml

If you had subscribed on 6th March 2008, it would have been possible to have 6% AER, as you would have had a full year at the fixed rate - it's now less than 11 months until the fixed rate ends, so the AER rate of interest which it is possible for you to achieve is less and will be even less next month, the following month and so on..

SparciaM wrote: »

My understanding of the account was that it would stay at 6% until March 2009 and then drop to 4.75% (whenever you opened it), obviously that isn't the case.

It WAS the case, IF you had opened the account on 6th March, the later you subscribe to the account, the lower the attainable AER will be, as you've seen from this month's figure - it will finally drop to a 4.75% variable rate as of 6th March 2009.