Interest calculations...A lesson learned the hard way, or is this just wrong?

ClassicalMusicFan

Hi all,

This is my first post on the forum - please be gentle

I took out an egg online savings account last year, the advertised AER being 3.25%. I saved very hard over the last 12 months, putting a over a couple of hundred pounds aside each month, and was expecting a nice little bit of interest to land into my account last week as the 12 months was up.

I did get paid interest, but it was nowhere near as much as I had been expecting. I politely wrote to Egg, saying that there must be shome mishtake shurely...

Egg wrote back, saying that there was no error. They said that, as my interest was calculated daily (eh??), all the figures were correct. They even included a nice spreadsheet with a breakdown of the interest added every day (daily rate of 0.000087630!!), except that the quoted annual interest rate is quoted as 3.1985%, not 3.25% as my initial welcome letter said..

I feel a bit miffed to put it lightly, and a bit naive. I had assumed that at the end of the year I would receive 3.25% of the final figure in my account. The fact that interest was paid daily was certainly not made clear in my online balance. The account only showed payments that I had made into the account and never indicated that interest was being calculated and added on a daily basis.

The reason for writing this is to vent some frustration :mad:, both at egg and myself, but also to ask more experienced savers whether this is indeed fair. I opened the account after seeing the headline rate advertised on this site, and I think I've just learnt a big lesson. Should I challenge the discrepancy in the interest rates?

All the best to all,


CMF

LucyTheDwarf

Interest is normally calculated daily, and applied either monthly or annually. You only earn interest on money while it is in the account - so although you may have had, say, £1000 at the end of the year, you won't earn a year's interest on the entire amount, as it hasn't been there for a year. Some of this £1000 might have been in the account for entire year (i.e. deposited when you opened the account) whilst some will have only been in there a week or two, so will have only earned interest for a week or two. This is the way all savings accounts work, I am afraid!

If you want us to check the interest you have earned, give us a list of amounts paid in and dates, and the interest earned, and we will take a look for you. The rate you give of 3.1985% monthly rate equates to 3.15% AER (non compounded, because the interest isn't added monthly - it's only calculating interest on the balance of the account, rather than on the payments AND the interest accrued), so maybe the rate fell from when you applied (3.25% AER you say) to when you opened / funded the account.

ClassicalMusicFan

Thanks, Lucy.

Having taken time to calm down, I've come to the conclusion that Egg is probably right. I've just learnt a BIG lesson.

I'll give them a call tomorrow and ask them to explain the difference in interest rates though, even the difference is tiny.

LucyTheDwarf

PS: 3.15% AER is actually a good rate at the moment. It's just that no-one ever got rich from savings accounts interest alone. We all wish it was different.

Don't feel disheartened - I believe saving is always worthwhile, even if the rates available are rubbish.

CLAPTON

fair?

let say we have an a/c with 3% AER (annual equivalent rate)

lets have two people

person A opens an account with 1,000 and keeps the money there .... one years later they earn 3% i.e. £30

person B opens an savings a/c with £1 and then 364 days later adds £999 so after 1 year you have 1,000 ... do you really expect to earn the same as person A?


sadly, it shows how appalling the UK educational system that people simply don't understand simple arthmetic, rather than any failure of the banking system

Sceptic001

ClassicalMusicFan wrote: »

Thanks, Lucy.

Having taken time to calm down, I've come to the conclusion that Egg is probably right. I've just learnt a BIG lesson.

I'll give them a call tomorrow and ask them to explain the difference in interest rates though, even the difference is tiny.

For what it's worth, the daily figure they quote (0.00008763%) is also correct because interest is compounded daily. This means that you earn interest on the interest, so the annual rate is not 0.00008763% multiplied by 365, but 1.00008763 raised to the power of 365, which is 3.25%.

As Lucy says, you had a very good account while it lasted.

opinions4u

ClassicalMusicFan wrote: »

I took out an egg online savings account last year, the advertised AER being 3.25%. I saved very hard over the last 12 months, putting a over a couple of hundred pounds aside each month, and was expecting a nice little bit of interest to land into my account last week as the 12 months was up.

I did get paid interest, but it was nowhere near as much as I had been expecting. I politely wrote to Egg, saying that there must be shome mishtake shurely...

I think you exaggerate slightly.

Egg wrote back, saying that there was no error. They said that, as my interest was calculated daily (eh??), all the figures were correct. They even included a nice spreadsheet with a breakdown of the interest added every day (daily rate of 0.000087630!!), except that the quoted annual interest rate is quoted as 3.1985%, not 3.25% as my initial welcome letter said..

Egg are unusual in that they compoind the interest daily. In other words, somewhere in the background their computer is adding on interest each day and then paying interest on interest in future days. So it does compound to 3.25% AER.

I feel a bit miffed to put it lightly, and a bit naive. I had assumed that at the end of the year I would receive 3.25% of the final figure in my account. The fact that interest was paid daily was certainly not made clear in my online balance. The account only showed payments that I had made into the account and never indicated that interest was being calculated and added on a daily basis.

If you had £1,000 in there, untouched for the year, you would receive £32.50 interest. Then they will deduct tax at 20% reducing this interest to £26.00 net of tax.

Even if they weren't capitalising interest daily, you would still be getting £31.99 gross, £25.59 net. That's 41p per £1,000 per year less. So if you feel that you are significantly out of pocket, it's down to your maths, an almighty mess up at Egg (not explained from the way they calculate interest) or the deduction of income tax from your interest.

The reason for writing this is to vent some frustration, both at egg and myself, but also to ask more experienced savers whether this is indeed fair. I opened the account after seeing the headline rate advertised on this site, and I think I've just learnt a big lesson. Should I challenge the discrepancy in the interest rates?

Without knowing what your balances were at each date through the year, it's hard to verify what's right and wrong.

What did you get and how much did you think you should have got?

LucyTheDwarf

opinions4u wrote: »

Egg are unusual in that they compoind the interest daily. In other words, somewhere in the background their computer is adding on interest each day and then paying interest on interest in future days. So it does compound to 3.25% AER.

That's pretty neat, I didn't know they did that... not that it makes a big difference, but every little helps :T

ClassicalMusicFan

Thanks all, back to school for me.

CLAPTON

LucyTheDwarf wrote: »

That's pretty neat, I didn't know they did that... not that it makes a big difference, but every little helps :T

not really the AER or APR (for debts) tells the story and includes the how interest is compounded

so an AER of 3% with daily compounding is the same as an 3 % AER with monthly compounding
the 'daily or 'simple' or 'annual' rate will be different

Reaper

If we want to get really nerdy then you are actually (very slightly) worse off with Egg's unusual method of interest calculation because if you your close your account part way through the year the interest paid up to the closing date is calculated as if you will get compound interest on it for the rest of the year, which of course you won't.

Hmmm. I didn't explain that very well did I? Never mind, we are talking trivial sums of money.