Monthly or Annual Interest on Savings?

MasterandPuppet

Hi guys,

I'm looking into applying for the Santander eSaver but I've got a question about the interest.

I know that practically speaking the amount paid in interest doesn't change even though the % is different between a monthly/annual rate however I'm intending to use it to drip-feed into other regular savings and ISAs over the year.

Given that I will be regularly withdrawing and investing is there any financial advantage to one or the other or would it simply be luck of the draw (i.e. the amount in the account on the particular day that the interest is calculated.)

Cheers,

M&P

psychic_teabag

My reckoning is that if money is in for less than a year, you get slightly more using annual interest than monthly interest (if the AER is the same).

The interest is calculated every day, not based on sampling the balance on particular days.

The only other factor to consider is whether there are any tax advantages in deferring the income till a years time (eg your tax band might fall).

nilrem_2

I tend to go for the monthly option mainly because I have Fixed rate accounts and have the monthly interest paid into my current account to live on.

If your account is an easy access account then you can draw out as you wish so it makes little difference apart from the Tax issue as mentioned above by Teabag.

(Monthly interest does sort of give one a satisfaction feeling seeing it appear on your bank statement each month!)

CKhalvashi

Typically you’re earning interest on interest with monthly payments, so I’ll work out the following:

£3000 at 2.00% annual = £60.000 interest before tax
£3000 at 1.98% monthly = £60.432 interest before tax.

It’s completely your choice, but the monthly rate seems the better option. unless the difference are dire.

Take the yearly interest rate, divide by 12, then multiply the full amount by the monthly interest rate to get the answer.

psychic_teabag

CKhalvashi wrote: »

Typically you’re earning interest on interest with monthly payments, so I’ll work out the following:

£3000 at 2.00% annual = £60.000 interest before tax
£3000 at 1.98% monthly = £60.432 interest before tax.

It’s completely your choice, but the monthly rate seems the better option. unless the difference are dire.

Take the yearly interest rate, divide by 12, then multiply the full amount by the monthly interest rate to get the answer.

Not quite sure how you get your monthly figure. I reckon 1.98% pa is 0.165% per month.

A simple interest calculation would be £3000 * 0.165 * 12 = £59.4
A compound calculation would be £3000 * ((1.00165 ^ 12) - 1) = £59.94

But these are over the whole year. My point is that if they money is in for less than a year, the monthly interest doesn't get a chance to compound to make up for the lower gross rate.

Basically, for one month you earn at the gross rate, for a whole year you earn at the AER, and for between those two durations, you earn something in between. For annual interest, the gross rate is the AER and so you earn that no matter what. But for monthly interest, gross rate is less than AER, ergo you earn less for durations less than a year. But we're only talking fractions of a percent here.

MasterandPuppet

Thanks for the responses guys.

I hadn't considered that the interest wasn't sampled although it does make a lot of sense and explains why I couldn't get an answer when I tried Googling it!

I don't expect a change in Tax bracket but it is another good point given that I've just jumped into one. I was intending on keeping the account for just over the year (claim the bonus interest then ditch & switch) but judging by Psychic Teabag's and CKhalvashi's estimates we are talking about perhaps the price of a cup of coffee in Costa which leads me on to Nilrem:

If I take the monthly option but find a better savings account in the meantime then I can switch accounts there and then but with annual my first thoughts were that I would miss the interest altogether. However I remember reading somewhere on closing the account the bank would calculate the interest based on the length of time the account had been held for anyway. If that is the case then I'm really thinking about nothing!

psychic_teabag

Yes, you usually get all the interest paid immediately on account closure. But sometimes the bonus has different terms. A recent account from Monmouth had a bonus which was paid on the anniversary provided the account was still open. And I think Halifax have/had a reward scheme where you get an extra 0.2%, but again possibly paid on the anniversary only if the account is still open. But I may be misremembering that one.

OTOH, nationwide had an account (esaver plus, or something) where they would retrospectively reduce the interest rate if you closed the account. Something like that, anyway. EDIT: just checking - 5 withdrawals per year inc. closure. If closing after 5 withdrawals, reduced rate applied since opening or more recent anniversary. I had remembered something more Draconian than that - might have changed, or I might just have got that wrong too.

I'm not very good at closing accounts - have old accounts all over the place with £1 in. Often you have to phone or write to close an account that was created online, and I'm just really bad at getting round to that sort of thing.

opinions4u

A basic rate taxpayer would get a higher return taking annual interest rather than interest capitalised monthly.

Ilya_Ilyich

Yeah, the interest is calculated to the date of closing. It really is a wash, the only difference is how often you want to receive the payment.

psychic_teabag

MasterandPuppet wrote: »

I was intending on keeping the account for just over the year (claim the bonus interest then ditch & switch) but judging by Psychic Teabag's and CKhalvashi's estimates we are talking about perhaps the price of a cup of coffee in Costa

Just to be clear (and pedantic), since you said in the first post that you'd be adding and withdrawing money all the time - it's not how long you have the account for, it's how long each parcel of money spends in the account.

The interest is all linear, so you can treat the total balance as a collection of parcels all separately earning interest. Each parcel spends a different length of time in the account.

But it's still peanuts.

MasterandPuppet

Yea I need to have a clear up, I've got several with £1 in too!

I see now that there is very little choice to be made in any case. Although opinions4u comment has confused me!

As it turns out, having read some of the Ts&Cs for the account, Santander will only link to an outside current account using annual interest anyway. Still, it has been interesting to find out a little more about how this works; thanks again all.