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  • FIRST POST
    • AntiqueSquid
    • By AntiqueSquid 28th Jul 17, 11:52 AM
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    AntiqueSquid
    AER does not (seem to) match what bank says will be in account after 1 year [Help!]
    • #1
    • 28th Jul 17, 11:52 AM
    AER does not (seem to) match what bank says will be in account after 1 year [Help!] 28th Jul 17 at 11:52 AM
    Apologies for the bad title, I could not think of a better way.

    The bank First Direct is currently advertising 5% AER in their regular saver account. I would hope to put the maximum in each month (£300). This would lead to £3600. 5% would lead to £3780 - however, this is not what they claim you will have. According to their own figures in their "interest rate and charges" booklet, the "after one year" figure is £3697.50, which, to me, is wrong.

    If someone could explain this, I would be grateful.
Page 1
    • eskbanker
    • By eskbanker 28th Jul 17, 11:58 AM
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    eskbanker
    • #2
    • 28th Jul 17, 11:58 AM
    • #2
    • 28th Jul 17, 11:58 AM
    You only earn interest on what is actually in the account!

    So, the first £300 will earn 5%, the second will only earn 11/12ths of 5% as it will only have been in the account for 11 months by the end of year one. And so on, with the last £300 earning just 1/12th of 5%.

    The net effect is that the average balance over the year is only just over half of the closing balance, and hence the interest being just over half of what you thought.
    • AntiqueSquid
    • By AntiqueSquid 28th Jul 17, 12:01 PM
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    AntiqueSquid
    • #3
    • 28th Jul 17, 12:01 PM
    • #3
    • 28th Jul 17, 12:01 PM
    Thank you very much, I thought it must have been something simple I was overlooking. Seems dodgy to me to have such a system, but oh well!
    • MrWizard
    • By MrWizard 28th Jul 17, 12:02 PM
    • 26 Posts
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    MrWizard
    • #4
    • 28th Jul 17, 12:02 PM
    • #4
    • 28th Jul 17, 12:02 PM
    I think this is right. Month, Balance, Interest for that month
    • 1 Month £300.00 £1.25
    • 2 Months £600.00 £2.50
    • 3 Months £900.00 £3.75
    • 4 Months £1,200.00 £5.00
    • 5 Months £1,500.00 £6.25
    • 6 Months £1,800.00 £7.50
    • 7 Months £2,100.00 £8.75
    • 8 Months £2,400.00 £10.00
    • 9 Months £2,700.00 £11.25
    • 10 Months £3,000.00 £12.50
    • 11 Months £3,300.00 £13.75
    • 12 Months £3,600.00 £15.00
    • jimjames
    • By jimjames 28th Jul 17, 12:09 PM
    • 12,096 Posts
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    jimjames
    • #5
    • 28th Jul 17, 12:09 PM
    • #5
    • 28th Jul 17, 12:09 PM
    Thank you very much, I thought it must have been something simple I was overlooking. Seems dodgy to me to have such a system, but oh well!
    Originally posted by AntiqueSquid
    What's dodgy about only paying interest on money you have in the account? It would certainly be dodgy using the same process you seem to be suggesting by charging you interest on your mortgage when you'd paid it off!
    Remember the saying: if it looks too good to be true it almost certainly is.
    • dunstonh
    • By dunstonh 28th Jul 17, 12:17 PM
    • 89,852 Posts
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    dunstonh
    • #6
    • 28th Jul 17, 12:17 PM
    • #6
    • 28th Jul 17, 12:17 PM
    Seems dodgy to me to have such a system, but oh well!
    What is dodgy about it?

    Dodgy would be expecting interest on money you haven't deposited.
    • ChesterDog
    • By ChesterDog 28th Jul 17, 12:40 PM
    • 787 Posts
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    ChesterDog
    • #7
    • 28th Jul 17, 12:40 PM
    • #7
    • 28th Jul 17, 12:40 PM
    You earned 5% per annum on everything you deposited.

    That's not the same as earning a 5% return on everything you deposited.
    I am one of the "Dogs of the Index".
    • AntiqueSquid
    • By AntiqueSquid 28th Jul 17, 1:28 PM
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    AntiqueSquid
    • #8
    • 28th Jul 17, 1:28 PM
    • #8
    • 28th Jul 17, 1:28 PM
    To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.
    • ruperts
    • By ruperts 28th Jul 17, 1:54 PM
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    ruperts
    • #9
    • 28th Jul 17, 1:54 PM
    • #9
    • 28th Jul 17, 1:54 PM
    It does say "interest calculated daily" on their website:

    http://www1.firstdirect.com/1/2/savings-and-investments/savings/regular-saver-account#at-a-glance

    But to be fair, to the uninitiated that statement probably doesn't mean much. You're not the first and won't be the last to make this mistake.
    • Aretnap
    • By Aretnap 28th Jul 17, 1:55 PM
    • 2,775 Posts
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    Aretnap
    To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.
    Originally posted by AntiqueSquid
    Banks are required to advertise the AER to make it easy to compare accounts. Your money is always better off in an account paying 5% AER than one paying (say) 3% AER, even if it's only in the 5% AER one for a short period.

    A bank might advertise a normal instant access savings account as paying 3% AER*, which shows the amount of interest you'd get if you made a single deposit then left it there for a year. Presumably nobody would assume that meant that you could deposit £1 in January then another £999 in December and get £30 interest the following January - but that's exactly the logic that makes people expect that they'll get 5% of the final balance of the regular saver account.

    Now, imagine that HSBC did advertise their regular saver as paying 2.5% of the final balance. This might prevent some people being confused about how much interest to expect - but it would cause confusion in other ways as people would think that they were better off keeping their money in the normal savings account paying 3% AER than they were putting it into the regular saver paying "2.5%". This would not be correct - you will always earn more interest by moving money from the normal account to the regular saver account, even if you don't/can't move it all at once. Advertising the regular saver as paying 5% AER makes this important point clear.

    In other word's: it's not dodgy; it's exactly how it's supposed to work, and having a single method of calculating the interest rate is to the customer's benefit.

    *OK, in the current market you won't find many instant access accounts paying 3%, but bear with me; it's an example for illustration
    • HappyHarry
    • By HappyHarry 28th Jul 17, 1:56 PM
    • 411 Posts
    • 485 Thanks
    HappyHarry
    To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.
    Originally posted by AntiqueSquid
    It is here https://www1.firstdirect.com/1/2/savings-and-investments/savings

    where the headline says:

    5% AER/gross fixed for 12 months.

    Interest calculated daily and paid on 12 month anniversary of account opening.


    and here https://www1.firstdirect.com/1/2/savings-and-investments/savings/regular-saver-account

    where it says

    interest is calculated daily and paid 12 months after you opened the account
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • bowlhead99
    • By bowlhead99 28th Jul 17, 2:02 PM
    • 6,741 Posts
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    bowlhead99
    To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.
    Originally posted by AntiqueSquid
    You cannot find where it says monthly interest is paid... because monthly interest is not paid.

    At the end of the year they work out how much money you are owed, and pay it. They couldn't tell you today how much you would earn in any one particular month because they don't know how much you would have chosen to have put into the account by that point. And they are not going to pay you out as you go along anyway, they are going to pay you at the end.

    What they can say is that if you paid the max on day one and kept putting in the next monthly amount as soon as you were allowed, the max you could earn over the year is £x.

    As different accounts have different terms and funding timescales, and some pay monthly letting you earn interest on the interest in the account, and some just build it up and pay it at the end, the regulator has said everyone should present their figures with a standard methodology. That's the "annual equivalent" rate. The effective annual rate you would get on money in that account if you kept it in there for a full year and it was all paid once annually.

    In other words,
    The first £300 would get 5% if you left it in the account for a year, and it does. (5%, £60).

    The next £300 would get 5% if you left it in the account for a year, but you don't. When the payout date / account closure comes around, the second £300 hasn't been there a year so it can't get the whole 5%, £60, you get some lower number instead. You can still call it a 5% account though, cos that's what money on the account earns for every year it's in there.

    There's no need for them to tell you all the possible amounts of money you might earn for every potential funding schedule you might have. 5%AER is fine, so you can compare it to other accounts and see if that's higher or lower than what those other accounts would pay on money in them. If like many people you are drip feeding monthly you will be earning interest at rate 'a' on some of your money and interest at rate 'b' or rate 'c' or rate 'd' on other chunks of money for a given month.
    • AntiqueSquid
    • By AntiqueSquid 28th Jul 17, 2:22 PM
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    AntiqueSquid
    Thank you all for your input.

    I will explain that "interest calculated daily" to me meant they check daily to prevent you taking money out yet getting interest on the old amount. i.e they check on the 4th, you have £5,000, but pay interest on the 8th, by which point you had already moved the money to a different account to play the system. I simply assumed this was the purpose of "interest calculated daily".

    The fact it said "paid at the end of the year" did not aid my thinking.

    I'm sure you can understand where my confusion came from. Now that I have been informed, I will not make the same error again.

    Personally, it would be nice if on the websites they explained the 12/12 5% 11/12 5% etc... but alas they do not.

    Thanks again all.
    • tangerine2
    • By tangerine2 12th Aug 17, 1:13 PM
    • 29 Posts
    • 8 Thanks
    tangerine2
    Just found this thread as I was expecting 6% interest on the £3000 I put in over the last year and only received £96.80 interest when I was expecting £180. Der, that was never explained to me but I can see it now, thanks for explaining. Is it worth taking out another one!
    • bowlhead99
    • By bowlhead99 12th Aug 17, 1:43 PM
    • 6,741 Posts
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    bowlhead99
    Just found this thread as I was expecting 6% interest on the £3000 I put in over the last year and only received £96.80 interest when I was expecting £180. Der, that was never explained to me but I can see it now, thanks for explaining. Is it worth taking out another one!
    Originally posted by tangerine2
    Yes, it is worth taking out another one.

    You will have been earning "6% a year" (which is around half a percent a month, or a bit less than 0.02% a day) of interest on the money that is in the regular savings account ; and the money that is not yet in the regular savings account (because of being restricted to how much you can put in per month) will have been earning whatever rate it gets in that other place. That 'whatever rate it gets in the other place' is going to be less than 6% because 6% is the highest rate in town.

    So, even if you can't get all your savings into that regular saver account on day one because there is a limit to how much they'll accept per month... clearly it is better to be getting interest at a nice high rate of 6% per year in an account on some of your money, than not using the account and not getting as much as 6% on any of your money. You will get more total interest on your savings by using the account than not using the account.

    So in month 1 you would have £250 in the regular saver account earning 6% per year, and you'd have some money at a lower rate that can't fit in the regular saver. If the alternative is to not bother opening the regular saver account at all, and have *all* your money at the lower rate, then obviously you won't make as much interest as you'd make if you accepted 6% on a chunk of your money.

    So yes, if your special regular saver rate is coming to an end, open another one. Although generally the top regular savers are only 5% a year these days instead of 6%.
    • tangerine2
    • By tangerine2 12th Aug 17, 5:23 PM
    • 29 Posts
    • 8 Thanks
    tangerine2
    Yes, it is worth taking out another one.

    You will have been earning "6% a year" (which is around half a percent a month, or a bit less than 0.02% a day) of interest on the money that is in the regular savings account ; and the money that is not yet in the regular savings account (because of being restricted to how much you can put in per month) will have been earning whatever rate it gets in that other place. That 'whatever rate it gets in the other place' is going to be less than 6% because 6% is the highest rate in town.

    So, even if you can't get all your savings into that regular saver account on day one because there is a limit to how much they'll accept per month... clearly it is better to be getting interest at a nice high rate of 6% per year in an account on some of your money, than not using the account and not getting as much as 6% on any of your money. You will get more total interest on your savings by using the account than not using the account.

    So in month 1 you would have £250 in the regular saver account earning 6% per year, and you'd have some money at a lower rate that can't fit in the regular saver. If the alternative is to not bother opening the regular saver account at all, and have *all* your money at the lower rate, then obviously you won't make as much interest as you'd make if you accepted 6% on a chunk of your money.

    So yes, if your special regular saver rate is coming to an end, open another one. Although generally the top regular savers are only 5% a year these days instead of 6%.
    Originally posted by bowlhead99
    Thank you for the explanation and advice. Yes the interest is now 5% - the most I can save is £250 a month but as you suggest, any interest is better than nothing.
    • katejo
    • By katejo 12th Aug 17, 7:01 PM
    • 2,978 Posts
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    katejo
    Thank you for the explanation and advice. Yes the interest is now 5% - the most I can save is £250 a month but as you suggest, any interest is better than nothing.
    Originally posted by tangerine2
    I have one of these with FD which is just about to pay out. I know how much to expect but really wish I could pay a bit extra in each month.
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