ISA or Savings

rb10

digivate wrote: »

Due to the drip feeding process you'll only receive interest on roughly 50% of the final balance.

This is a fact, and it's only your willful misreading of what I've said that causes any argument.

[...]

I've seen threads on this forum where people question why the annual interest on their regular saver accounts has turned out to be half of what they expected. If you invest £250 a month (£3,000 over the course of a year) in an account with a 10% interest rate you won't get a 5% return on all £3,000 (£300) ... you'll get a 10% return on roughly £1,500 (approx £150) as that is the average amount in the account over the course of the year.

Although the what you claim here has the effect of you ending up with roughly the correct amount of interest, this is wrong.

Lots of people do get confused when it comes to how interest is calculated, so I'll try to explain how it works.

On any account - not just Regular Savers - interest is calculated on a daily basis. But as a Regular Savings account balance would typically only change monthly, I'll assume that each month is of equal length, and any one month is 1/12th of a year.

Each month, you'd get 1/12 * interest rate * balance for that month. If the balance remained the same for the whole year, then you'd get 12 equal lots of this, which is interest rate * balance, as expected.

So, say for example you were putting in £250 per month:
For Month 1, you'd get 1/12 * interest rate * 250
For Month 2, it would be 1/12 * interest rate * 500
... and so on ...
For Month 12, it would be 1/12 * interest rate * 3000

Add all these up, and you'll find it's very close to the amount of interest you were paid.

So, for each day in the year, you are in fact getting interest on the full amount of money that is in the account, and not just "only get interest on a balance of about £1,500" (as you claimed in post #12).

As an alternative way of looking at it, imagine you opened an instant access account paying 5% interest. You didn't put any money into it until the day before interest was due to be paid, when you paid in £3650. When you were paid the interest, you'd get 50p. Would it be correct to say that the bank only paid interest on £10 (=3650/365) of your money? No, what is correct is that they paid interest on the full £3650, but as they only had your money for one day, they could only pay interest on the balance for that single day.

RayWolfe

rb10 wrote: »

As an alternative way of looking at it, imagine you opened an instant access account paying 5% interest. You didn't put any money into it until the day before interest was due to be paid, when you paid in £3650. When you were paid the interest, you'd get 50p. Would it be correct to say that the bank only paid interest on £10 (=3650/365) of your money? No, what is correct is that they paid interest on the full £3650, but as they only had your money for one day, they could only pay interest on the balance for that single day.

An excellent analogy.

MumOf2

Going back to the OP's dilemma, the problem with withdrawing money from the ISA at the end of the higher interest term and putting it in a non-ISA relatively high interest rate account or bond is that the ISA allowance is lost for good (in this case 3 years' worth!).

At the beginning of this year I transferred all my lower interest previous year ISAs into 3% - 3.25% fixed one/two year ISAs. For this year, I'm doing what JohnColesCarr is doing - £2,500 in Alliance & Leicester at 5%, £7,000 in Lloyds (Current Account with Vantage) at 4%, Barclays Reg Saver at 6% and HSBC Reg Saver at 8%. There will be plenty (and more besides) in March 2010 to withdraw £5,100 and subscribe to an ISA which will take care of this year's ISA allowance.

If ISA interest rates are better at the beginning of the 2010/11 tax year, I'll take the rest and put in my max allowance, otherwise just keep going as this year. However, the A&L 5% is only for one year and HSBC Reg Saver is stopping on 30th June, but I'm sure there will be other similar products available somewhere!

MumOf2