Monthly vs Annual interest

kawan2

Hi,

I have about 20K to put away. Will need access to this money as part of a house purchase if we find a suitable house in the next 12 months.

Was planning to put it in the Post Office savings account. Read the blurb below on the PO website.

1 If interest is paid annually: 2.90% gross3/AER Rate includes a 1.25% gross1 / AER fixed bonus for 12 months from account opening. Underlying rate 1.65% gross / AER.
If interest is paid monthly: 2.87% gross/2.90% AER. Rate includes a 1.23% gross / 1.24%AER fixed bonus for 12 months from account opening. Underlying rate 1.64% gross / 1.65%AER.

Question.

If I opt for annual interest but had to withdraw the 20K after say 9 Months, would I lose all the interest. Basically, should I opt for monthly interest since I do not know if I can put the 20K for a full 12 months.

Thanks.

p00hsticks

Whether interest is paid monthly or annually, it is almost certain to be calculated daily, so there will be no difference.

With regard to whether you would lose interest if you withdraw money before a year, then I think what you need to be looking at rather than the different methods of interest payment is whether there are any penalties or restrictions for withdrawals.


If this is the Online Saver you are looking at then according to their website it says:

Withdrawals arrangements - No notice period. All withdrawals are sent by BACS to your nominated account

Milarky

Monthly interest is paid at same compound rate as annual. So ignoring the miniscule reduction this will cause if tax is deducted* it's by far the preferable option over annual interest. If you can see interest being added every month you know you are basically 'up-to-date'. If the rate were to change suddenly (like at the end of a bonus period) the fact becomes immediately evident - which is not so with annual interest (That's one of the gripes about the Tesco Internet Saver, btw - bonus period ends on your 'anniversary' interest only gets paid ONCE a year - always at 31 March)

*2.87 divided by 12 = 0.2391666% per month = 0.1913333% for BR taxpayers

100.1913333% compounded for 12 months = 102.32% (and some change)

2.90% after 20% tax = 2.32% (exactly)
IN FACT they have set the monthly rate slightly higher (because of rounding) so there is no loss/disadvantage at all.
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kawan2

Thank you for all the replies. Will go for the monthly interest option.

Loughton_Monkey

Milarky wrote: »

Monthly interest is paid at same compound rate as annual. So ignoring the miniscule reduction this will cause if tax is deducted* it's by far the preferable option over annual interest. If you can see interest being added every month you know you are basically 'up-to-date'. If the rate were to change suddenly (like at the end of a bonus period) the fact becomes immediately evident - which is not so with annual interest (That's one of the gripes about the Tesco Internet Saver, btw - bonus period ends on your 'anniversary' interest only gets paid ONCE a year - always at 31 March)

*2.87 divided by 12 = 0.2391666% per month = 0.1913333% for BR taxpayers

100.1913333% compounded for 12 months = 102.32% (and some change)

2.90% after 20% tax = 2.32% (exactly)
IN FACT they have set the monthly rate slightly higher (because of rounding) so there is no loss/disadvantage at all.
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I don't agree that monthly is best from a financial point of view. I see the point about 'visibility', but as long as you trust the institution and have a full grasp of the T&C, this is not necessary.

There is no need to do calculations. Banks will set their "APR" for the account at a single figure - say 2.9% - whether it's annual or monthly interest. In published data, they will round the AERs.

But for a taxpayer, monthly interest simply generates a much 'earlier' stream of tax to HMRC and so even when the 'net' interest is allowed to roll up, it will fall some way short of the equivalent annual interest account. [Non taxpayers who roll up interest would receive exactly the same.]

I agree that the difference is quite small, but on principle, I always try not to pay the Governement any quicker than I have to.