Annual vs. monthly interest

book12

I want to open a savings account. It lets me have an option to choose the frequency of when the interest is paid (monthly or annually). Which one is better?

Suggestions appreciated.

Baldur

See http://www.moneysavingexpert.com/banking/interest-rates#AER

D1zzy

Upto you - If you do not withdraw the interest monthly you will end up with the same amount overall. I choose annual 'cos it defers the tax liability.

Lansdowne

D1zzy wrote: »

Upto you - If you do not withdraw the interest monthly you will end up with the same amount overall.

That is of course true if the account says the AER is the same for monthly and annual. Some accounts publish lower rates for monthly.

Example: Nationwide 2 year fixed rate e-Bond:
Monthly interest 3.40% (3.45% AER)
Annual interest 3.50% (3.50% AER)

A few have a larger difference than this. Usually annual is best.

rb10

Lansdowne wrote: »

That is of course true if the account says the AER is the same for monthly and annual. Some accounts publish lower rates for monthly.

Example: Nationwide 2 year fixed rate e-Bond:
Monthly interest 3.40% (3.45% AER)
Annual interest 3.50% (3.50% AER)

A few have a larger difference than this. Usually annual is best.

In this example, however, the monthly AER is very much a notional rate, as the monthly interest can only be paid into the linked Flexaccount, and the AER of 3.45% is based on reinvesting the interest at 3.4% as soon as it is paid.

Where monthly interest is paid out of the account, this is another factor to consider - where will you put it?