Regular Savings accounts - interest is less than you expect

chaddman

Regarding regular savings accounts.
My understanding is that the interest you receive is actually less than you would think.
If, say, an account advertised 6%, then you would receive 6% on the investment in the first month, 11/12th of 6% for the 2nd month, 10/12th for the 3rd month etc. Of course each month only earns 1/12th the full years interest. So in fact the true interest rate is actually:
(12/12 + 11/12 + 10/12 + ……. 1/12) all divided by 12
This comes to about 0.54.
So if you were to invest a lump sum of say £1200 at 6% then before tax you would earn £72
But if the money went into a regular savings account at 12 lots of £100 per month at 6% then you the pre-tax interest would only be about £38.90 (which is 0.54 of 6% or 3.24%).
I was actually told this by someone at Halifax a few years back and advised me to invest a lump sum instead. But most banks/building societies tend to keep quiet about this!

mars_2

Correct

You get more interest off a lump sum than a regular saver.

But when you use a regular saver it usually means your saving future earnings not past earnings (unless you are drip feeding off another account)

nig0609

I agree, you only get about half the interest on the total (of a regular saver) as it is deposited over the year because the average balance in the account is about half the total.
However the money waiting to go in the regular saver account should be in your next best instant access saver (earning about 3-4% at best these days) so you could argue the interest your money earns could be between 4 and 5%

I have a barclays monthy saver and that is the way I look at it. I only transfer money by SO into my barclays current account (earning 0.1% int) a few days before the SO sends money to the regular saver

rb10

chaddman wrote: »

I was actually told this by someone at Halifax a few years back and advised me to invest a lump sum instead.

It was clealy someone who did not properly understand Regular Savers who told you that. The interest is only less than you think if you do not understand how interest works.

If the Regular Saver has a rate of 6%, then you are getting 6% throughout the whole year. It is just that for part of the year, you only have a smaller balance, so obviously you will accrue less interest during that time.

If there was a fixed term account paying 6% and a Regular Saver paying 6%, then you would be better off putting the money in the fixed term account.

However, whilst a 6% (or nearly 6%) Regular Saver account is fairly easy to come by at the moment, I challenge you to find 6% on a fixed term account. As the rates on these are more likely to be 3-4% max, you will probably be better off by drip-feeding money into a Regular Saver than by putting one lump sum in.

chaddman

No 'rb10' I stand by my belief that you only get 0.54 of the quoted interest.
If you look at the HSBC site - click on 'savings' - scroll down to 'regular saver'
They give the following information - quote:

"Worked example: If you invest £250 per month, a total of £3,000 will be paid into your account during the 12 month term. At 10% interest, you will earn approximately £163 interest (gross)."

Now, if that was a lump sum investment of £3k, the interest would be £300.
£163 is approx 0.54 of £300.

So a regular savings account is worse than a lump sum account if they both quote the same interest rate. Obviously, a regular saver is attractive if you don't have a lump sum.
Agreed there are no 6% accounts around at the moment - but that was not my point.
Some of the regular savings accounts are attractive because of the rates - but the 0.54 factor must be applied.

Mikeyorks

chaddman wrote: »

This comes to about 0.54.

No it comes to 6%.

But they only pay that on the money actually in the account. Not on that you consider you might put in at some time in the future?

It's a problem that's been misunderstood on many occasions :

http://forums.moneysavingexpert.com/showpost.html?p=4159743&postcount=9

Mikeyorks

chaddman wrote: »

Now, if that was a lump sum investment of £3k, the interest would be £300.

Only if the £3k was in the account a full year. If you put it in the day before interest was calculated ... at 10% ..... you would get £0.82p gross! Where does that leave your comparison?

CLAPTON

chaddman wrote: »

No 'rb10' I stand by my belief that you only get 0.54 of the quoted interest.
If you look at the HSBC site - click on 'savings' - scroll down to 'regular saver'
They give the following information - quote:

"Worked example: If you invest £250 per month, a total of £3,000 will be paid into your account during the 12 month term. At 10% interest, you will earn approximately £163 interest (gross)."

Now, if that was a lump sum investment of £3k, the interest would be £300.
£163 is approx 0.54 of £300.

So a regular savings account is worse than a lump sum account if they both quote the same interest rate. Obviously, a regular saver is attractive if you don't have a lump sum.
Agreed there are no 6% accounts around at the moment - but that was not my point.
Some of the regular savings accounts are attractive because of the rates - but the 0.54 factor must be applied.

you seem to be ignoring the fact that 6% APR means PER ANNUM ... i.e. the interest you would get if you invested for 12 months.
...and not 11 months or 10 months or 9 months etc.

chaddman

Correct. The point being that these banks try to flog these accounts at what seems to be an attractive rate but at the end of the period you may be surprised to receive less interest than you thought you were going to get.

Mistert_2

Halifax Bank say they'll give you £5 a month if you invest £1,000 every month. It claims to be 6.25%. But if you put in £1,000 a month which is £12,000 in the year you only get £60 back. Surely the true rate of interest is 0.5%?
Mistert

nig0609

chaddman wrote: »

Correct. The point being that these banks try to flog these accounts at what seems to be an attractive rate but at the end of the period you may be surprised to receive less interest than you thought you were going to get.

agreed, they seem attractive but the actual gain is very low as you cannot put anything significant into it, I have a regular saver at 7.8% - 6 months in and I have only got about £25 interest to date - however this will keep improving as the balance goes up.