Annual vs monthly interest on an ISA

cleorox

I'm looking to transfer £2100 from an existing Firstdirect cash ISA on which the rate has just dropped. Interest has been paid monthly on this account. Most of the ISA accounts that offer the best rates pay interest annually so presumably I'd be losing the benefit of compound interest? How much of a difference does it make?

dtsazza

Short answer: no difference.

The interest rates should be quoted as AER (Annual Equivalent Rate), which is the effective rate you'd get for holding your money there for one year, including compounding. With annual interest, this will be equal to the nominal interest rate. With monthly interest, the nominal rate will be a bit lower than the AER (as it's brought up by the compounding), but the AER is still what you get in practice.

The only reason you might want to choose one rather than the other is if you intend to regularly withdraw the interest payments to spend them throughout the year, or similar reasons like that. If you're just planning to keep your money there while it grows, there's effectively no difference.

(It's worth noting as well that interest accrues daily, so if you close a yearly-interest account, or move the money out, after 10 months you will still get 10 months' worth of interest.)

innovate

It won't make any difference at all if you look at the AER ("annual equivalent rate") when comparing interest rates.

Zero_Sum

I have my ISA at Nationwide & they told me that for their ISA's monthly interest counted towards you're ISA allowance & therefore won't be able to invest your full allowance

Masomnia

Zero_Sum wrote: »

I have my ISA at Nationwide & they told me that for their ISA's monthly interest counted towards you're ISA allowance & therefore won't be able to invest your full allowance

That sounds very wrong to me, think someone at NW got the wrong end of the stick there.

opinions4u

Zero_Sum wrote: »

I have my ISA at Nationwide & they told me that for their ISA's monthly interest counted towards you're ISA allowance & therefore won't be able to invest your full allowance

They're talking tosh.

Linton

I was interested in this monthly issue and checked on the Nationwide WebSite. It would seem that the comment on loss of ISA status for monthly interest is correct and not "tosh".

With a Nationwide fixed term monthly interest ISA account interest is paid into a current account, not the ISA. So if you then wanted to move the interest back into the ISA it would be treated as a new deposit. Presumably if you wanted to keep interest within the ISA shelter there is no point in requesting monthly payment. Monthly payment I guess is designed for those who need a steady income.

Zero_Sum

Linton wrote: »

I was interested in this monthly issue and checked on the Nationwide WebSite. It would seem that the comment on loss of ISA status for monthly interest is correct and not "tosh".

With a Nationwide fixed term monthly interest ISA account interest is paid into a current account, not the ISA. So if you then wanted to move the interest back into the ISA it would be treated as a new deposit. Presumably if you wanted to keep interest within the ISA shelter there is no point in requesting monthly payment. Monthly payment I guess is designed for those who need a steady income.

I think it was the fixed term bond I enquired about.

opinions4u

Linton wrote: »

I was interested in this monthly issue and checked on the Nationwide WebSite. It would seem that the comment on loss of ISA status for monthly interest is correct and not "tosh".

The post stated that monthly interest was part of your ISA allowance. It isn't. Therefore it is tosh.

With a Nationwide fixed term monthly interest ISA account interest is paid into a current account, not the ISA. So if you then wanted to move the interest back into the ISA it would be treated as a new deposit. Presumably if you wanted to keep interest within the ISA shelter there is no point in requesting monthly payment. Monthly payment I guess is designed for those who need a steady income.

If you withdraw the annual interest from the ISA It is exactly the same as withdrawing monthly interest.

Once you choose to remove it from the ISA it loses tax free status.

bryanb

Tosh is the correct word. However once money is outside the ISA it is no longer "monthly interest"

Zero_Sum

opinions4u wrote: »

The post stated that monthly interest was part of your ISA allowance. It isn't. Therefore it is tosh.

If you withdraw the annual interest from the ISA It is exactly the same as withdrawing monthly interest.

Once you choose to remove it from the ISA it loses tax free status.

in this case it effectively is, as you're not allowed to have your monthly interest paid into your ISA, whereas if its paid annually you can. So if you don't wish to withdraw your interest, you're in effect losing some of your allowance by chosing the monthly option.