Incorrect ISA interest.

masonic

For a 1 year fixed rate account, the account year starts on the date the account opens and finishes exactly 1 year from that date. Either that period of time is 365 days or 366 days. Either way, the 'annual' in AER should relate to the same length of time as the '1 year' the account is open. Is there any disagreement with that scenario?

Edit: Having just re-read the OP, can I clarify something... Was the ISA account opened prior to 29th Feb 2008?

Cardew

sloughflint wrote: »

Cardew, I can't seem to make you understand. The AER quoted is correct.
All that has happened is that you have invested for 365 days some of which land in a leap year and the others do not.

You will not get anywhere with your complaint.
Your money was still earning 1/366th of whatever annual rate between 1/01/08 and 30/03/08 wherever your funds were before.

The only time your net result would coincide with 6.15% is IF you'd invested between 01/01/08 and 31/12/08 or your 365 days fell outside of a leap year.
NW is not being unusual.

sloughflint,

We really are at cross-purposes.

You keep explaining the method NW use - which is not in dispute(so I really do understand what you are saying)

My statement is simply that if I invest at 6.15% for 1 year, I should get 6.15%. So I contend that any accounting method that pays less than 6.15% is flawed.

Cardew

masonic wrote: »

For a 1 year fixed rate account, the account year starts on the date the account opens and finishes exactly 1 year from that date. Either that period of time is 365 days or 366 days. Either way, the 'annual' in AER should relate to the same length of time as the '1 year' the account is open. Is there any disagreement with that scenario?

Edit: Having just re-read the OP, can I clarify something... Was the ISA account opened prior to 29th Feb 2008?

Yes! I stated in post #1

I have a 2 year fixed rate ISA with Nationwide at 6.15% which I started in Jan 2008.

It was showing a balance on 31/3/2008 and shows the interest added on 31/3/2009.

Between the opening date and 31/03/08(61 days) it earned £287 interest.

In the (365 day) year from 31/03/08 to 31/03/09 it earned interest at a lower rate than 6.15%!

I think we all accept that in the (365 day) year from 31/03/09 to 31/03/10 it would earn interest at exactly 6.15%.

masonic

Cardew wrote: »

In the (365 day) year from 31/03/08 to 31/03/09 it earned interest at a lower rate than 6.15%!

The AER should be calculated from the date the account was opened to the date exactly 1 calendar year later (...and so on for subsequent years).

So if your account was opened on, say, 15th Jan 2008, then the interest payable between 15th Jan 2008 and 15th Jan 2009 should be exactly 6.15%, but it does not follow that interest earned between any two dates in your fixed term spaced a year apart would follow the same rule. There are 366 days between 15th Jan 2008 and 15th Jan 2009, but only 365 days between 31st Mar 2008 and 31 Mar 2009. Some of those days in the latter case fall into the '366 day AER year' and so interest has to be payable on those days at 1/366th of the AER rate.

Nationwide is therefore calculating interest in keeping with the AER (which runs from the date the account is opened), but paying it with part of the second years interest at the end of March. That's where the discrepancy comes in. Overall, at the end of the two years, you will receive the correct interest for the 366 days+365 days the account was open.

sloughflint

Cardew wrote: »

My statement is simply that if I invest at 6.15% for 1 year, I should get 6.15%. So I contend that any accounting method that pays less than 6.15% is flawed.

There are I believe in fact two issues going on here Cardew but you are earning an AER of 6.15%.

The absolute minimum interest on a 3k investment over two years would be 3000*1.0615^2= £380.34.
This would be achieved with a two year product that pays interest on anniversary or if the NW product was started on first April.

Regardless of whether a leap year is included in the investment period or not, I think that everyone would get a slightly different amount of interest depending on when they make their investment.

This is due to the fact that NW pay interest on a fixed date each year rather than 12 months from account opening so the compounding of the interim interest payment affects final payouts.

Then leap years affect the results some more. For example:

Two year product
* Start 1/2/07 £381.44 vs start 1/2/09 £ 381.98 ;slightly less when leap year
Start 1/7/07 £384.14 vs start 1/7/09 £ 382.61 ;more when investment period contains a leap year.

I don't know this product but I am basing the above on the fact that AER= gpa and interest is paid on 31/03 each year.
Hopefully I'm not talking rubbish here and haven't made errors but the fact remains I think that an AER of 6.15% is being paid despite irregularities in amounts of net interest paid.

Cardew

masonic wrote: »

The AER should be calculated from the date the account was opened to the date exactly 1 calendar year later (...and so on for subsequent years).

So if your account was opened on, say, 15th Jan 2008, then the interest payable between 15th Jan 2008 and 15th Jan 2009 should be exactly 6.15%, but it does not follow that interest earned between any two dates in your fixed term spaced a year apart would follow the same rule. There are 366 days between 15th Jan 2008 and 15th Jan 2009, but only 365 days between 31st Mar 2008 and 31 Mar 2009. Some of those days in the latter case fall into the '366 day AER year' and so interest has to be payable on those days at 1/366th of the AER rate.

Nationwide is therefore calculating interest in keeping with the AER (which runs from the date the account is opened), but paying it with part of the second years interest at the end of March. That's where the discrepancy comes in. Overall, at the end of the two years, you will receive the correct interest for the 366 days+365 days the account was open.

So to keep the arithmetic simple.

If I invested £1000 @ 10% for 1 year on 31 March 2008 on maturity I would expect to receive £100 interest.

Now do we not agree that given NW's accounting methods I will not get £100?

As I understand their accounting method I will get:

£1000*0.010*(275/366 + 90/365) = £99.74

Cardew

sloughflint wrote: »

There are I believe in fact two issues going on here Cardew but you are earning an AER of 6.15%.

The absolute minimum interest on a 3k investment over two years would be 3000*1.0615^2= £380.34.
This would be achieved with a two year product that pays interest on anniversary or if the NW product was started on first April.

Regardless of whether a leap year is included in the investment period or not, I think that everyone would get a slightly different amount of interest depending on when they make their investment.

This is due to the fact that NW pay interest on a fixed date each year rather than 12 months from account opening so the compounding of the interim interest payment affects final payouts.

Then leap years affect the results some more. For example:

Two year product
* Start 1/2/07 £381.44 vs start 1/2/09 £ 381.98 ;slightly less when leap year
Start 1/7/07 £384.14 vs start 1/7/09 £ 382.61 ;more when investment period contains a leap year.

I don't know this product but I am basing the above on the fact that AER= gpa and interest is paid on 31/03 each year.
Hopefully I'm not talking rubbish here and haven't made errors but the fact remains I think that an AER of 6.15% is being paid despite irregularities in amounts of net interest paid.

I agree with your figure of £380.34.

I haven't checked the figures in bold, but there isn't an issue when an investment covers all of 2008 - ie starts in 2007 - or starts in 2009. You get interest for 366 days for 2008.

However start your 2 year deal on, say, 31/03/2008 and using NW's accounting you will get less than your "absolute minimum interest" of £380.34

sloughflint

Cardew wrote: »

However start your 2 year deal on, say, 31/03/2008 and using NW's accounting you will get less than your "absolute minimum interest" of £380.34

Ok, I agree with you here for this one so my absolute minimum was wrong:
1.0615*[1+0.0615*(275/366+90/365)]= 1.1266478 <1.0615^2 which is 1.12678
Everything is stacked against this example as there is only one interim interest payment and doesn't include 29/02/08.

But there are other situations where it will be different and not necessarily because the whole of 2008 is included.

For example a start date of 1/2/08 gives a multiplyer of 1.12734 and that will be due to a combination of the extra day in Feb and two compounding interim interest payments.

A start date of 1/3/08 is also better (1.1269) and that is purely down to the compounding.

If your start date was in January 2008, I think you will be pleasantly surprised with the overall interest you'll receive.

sloughflint

Actually it would be far simpler if I used your specific dates and amounts.
I gather you opened with £28 000 on 31/01/08?

You received an interim payment on 31/03/08 of £287 ( 61/366*0.0615*28000)
New capital balance £28 287

Interest payment on 31/03/09: (275/366+90/365)*0.0615*28287= £ 1736.06

New capital balance= £ 30 023.06

Interest payment at maturity: 305/365*0.0615*30023.06= £1542.89

Maturity figure: £31 565.96
compared with: 28000*1.0615^2=£ 31549.90

Hope that makes you feel happier.

Cardew

sloughflint wrote: »

Actually it would be far simpler if I used your specific dates and amounts.
I gather you opened with £28 000 on 31/01/08?

You received an interim payment on 31/03/08 of £287 ( 61/366*0.0615*28000)
New capital balance £28 287

Interest payment on 31/03/09: (275/366+90/365)*0.0615*28287= £ 1736.06

New capital balance= £ 30 023.06

Interest payment at maturity: 305/365*0.0615*30023.06= £1542.89

Maturity figure: £31 565.96
compared with: 28000*1.0615^2=£ 31549.90

Hope that makes you feel happier.

Actually I believe that it would be 304 days as the £287 to 31/03/08 was for 61 days interest.(i.e. I got interest for 31st Jan - so 1 + 29 + 31 = 61) - see earlier post.

However that doesn't change the thrust of your argument.;)

Getting back to your previous post


I don’t agree that your minimum figure of £380.34 is incorrect. That is exactly the interest £3000 invested for 2 years at 6.15% should produce.

It is not the case that everything is stacked against the 31 March 2008 start date. Any similar investment started between 31 March 2008 and 30 December 2008 will produce a shortfall.

If you take a investment started 30 June 2008 the equation is:

3000*0.0615*(184/366 + 181/365)

Which produces a figure lower than your minimum for either a 1 or 2 year(or longer) deal.

Not by much but enough to prove the principle!