Monthly or yearly interest choices on an ISA?

broadbhoy

Hello everyone,i've been looking to open a cash isa and need some advice.with the economy the way it is i was tempted to lock my money into a 5 year isa.the AA are offering 5% for the 5 year period, but i'm stuck on whether to take the monthly or yearly options for the interest.on the yearly the gross p.a % is 5.00%,the net is 4.00% and the aer is 5.00%.on the monthly the gross p.a is 4.89%,the net is 3.89% and the aer is 5.00%.i was thinking of investing an initial £1000 and then adding what i can weekly (maybe about £50 upwards).was tempted to take the monthly option.i'm new to investing and not sure which option to take.thanks.:)

Derivative

Interest is calculated daily on most if not all savings accounts and so the monthly/yearly payment option makes no difference (the lower percentage rate on the Monthly exactly counterbalances the compound monthly interest you would make).

Most fixed-rate accounts don't allow you to deposit more as time goes on either. I am unsure about the AA but I would think it unlikely they allow you to do so - it would defeat the point of fixed-rate - I could deposit £1 today and then the rest in 4 years time if rates weren't at 5% by then.

YorkshireBoy

broadbhoy wrote: »

with the economy the way it is i was tempted to lock my money into a 5 year isa

I would have thought that was a reason to do exactly the opposite?

the AA are offering 5% for the 5 year period...the net is 4.00%

The use of the word "net" indicates this is not an ISA product, being as you don't pay tax on cash ISA interest.

psychic_teabag

It's the AER (annual effective rate, or something like that) you want to compare. The monthly rate is quoted as a slightly lower figure because the interest will earn interest, and it will end up equivalent to the annual rate.

Note that a fixed-term account doesn't usually allow you to add money over time - usually you have to put in the whole deposit up-front. Sometimes an account will accept new deposits while the offer is still available to new customers, but not once it has been withdrawn. If you want to build up the balance slowly, you'll probably have to go with an instant-access account - unless you can find a regular-savings ISA.

But if this is an ISA (tax-free) I don't understand why there's a net rate that's 1% lower than the gross rate. From a quick look at the AA's offerings, they don't seem to have a 5-year ISA, only a 5-year savings account.

broadbhoy

ok thanks.i thought you could add to the isa throughout the year.i was under the impression that the monthly interest would go straight into the account and also that from what i have read you can put upto £5100 yearly into an isa. so really what your saying is you can make a one of payment yearly.i may as well save my cash and put it in at the end of every tax year tax free.