loss of interest question

hebron

Hi,
I'm thinking about a fixed bond and it has a 180 day loss of interest on early closure.
How do you work this out please, just so that I understand.
Say a 5 year bond, an investment of £10,000 and closed after 3 years.
An interest rate of 5.3%
This is a fictional bond but it is close to a couple I am interested in.
I am interested in the calculation so I can work it out myself, so that I can make a decision.

Thank you very much.

LittleVoice

If it is possible to close it at the 3-year point, you would receive interest for the final year (let's say 365 days) minus 180 days.

So £10,000 x 5.3% = £530 gross.
(£530/365) x 180 = £261.36 gross
£530 less £261.36 = £268.64 gross
£268.64 x 0.8 = £214.92 after tax

Another way of looking at it would be that in your final year you would be receiving approximately half the interest rate, actually 2.68%.

And the above assumes that the annual interest was being paid to another account during years 1 and 2.

D1zzy

LittleVoice wrote: »

If it is possible to close it at the 3-year point, you would receive interest for the final year (let's say 365 days) minus 180 days.

So £10,000 x 5.3% = £530 gross.
(£530/365) x 180 = £261.36 gross
£530 less £261.36 = £268.64 gross
£268.64 x 0.8 = £214.92 after tax

Another way of looking at it would be that in your final year you would be receiving approximately half the interest rate, actually 2.68%.

And the above assumes that the annual interest was being paid to another account during years 1 and 2.

Just a warning most of these are not loss of actual interest but a penalty based on X days gross interest -so in the case above
Penalty - £261.36 gross
But tax is still due on the full interest received £530 ie £106

LittleVoice

D1zzy wrote: »

Just a warning most of these are not loss of actual interest but a penalty based on X days gross interest -so in the case above
Penalty - £261.36 gross
But tax is still due on the full interest received £530 ie £106

Are you sure? The interest is never paid, so how can it be taxed? I find it hard to see that the institution would find it necessary to hand over the tax to HMRC for this.

Can you tell us which banks/building societies do as you suggest?

D1zzy

LittleVoice wrote: »

Are you sure? The interest is never paid, so how can it be taxed? I find it hard to see that the institution would find it necessary to hand over the tax to HMRC for this.

Can you tell us which banks/building societies do as you suggest?

Interest is paid upto the date you withdraw.
It depends on Ts and Cs but normally you do not lose interest, you pay a penalty equivalent to X days interest

In my experience its been the norm - as with the NSI {Can be cashed in early, with a penalty equal to 90 days’ interest} -the HBOS fixed bonds appear however to say "loss of interest" rather than penalty , but check the Ts and Cs of any that you are interested in. If it says "penalty equivalent to"- then its as above

Here's another example - "halifax web saver extra" ........""Unlimited withdrawals - 1 withdrawal a year with no loss of interest. Make any further withdrawals and you'll lose the equivalent of 30 days interest (just on the amount you withdraw)"

hebron

LittleVoice wrote: »

So £10,000 x 5.3% = £530 gross.
(£530/365) x 180 = £261.36 gross
£530 less £261.36 = £268.64 gross
£268.64 x 0.8 = £214.92 after tax

In the last bit of calculation, what is the 0.8 please?
Thanks.

firsttimestudent

hebron wrote: »

In the last bit of calculation, what is the 0.8 please?
Thanks.

It's to get the net interest.

Assuming you're taxed at 20% (standard rate), we multiply the gross value by 0.8 to arrive at the net interest.

hebron

Thanks for that firsttimestudent