Annual vs monthly interest on an ISA

Linton

bryanb wrote: »

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

And if you choose monthly interest you can not keep it within the ISA.

innovate

Zero_Sum wrote: »

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.

Linton wrote: »

And if you choose monthly interest you can not keep it within the ISA.

What I don't understand is why you would want monthly interest if you didn't intend to spend it. If you do intend to spend it, then there is a sound reason why they pay it straight into your current account - it is to save you from penalties that would be payable if you withdrew any money from a fixed term account before maturity (if indeed they would allow any withdrawals at all).


In any case, as has been mentioned already in this thread

• once money has been taken out of an ISA, it is no longer tax free. Also, your annual allowance does not get changed by withdrawals
• you do not lose any money if you opt for annual interest. The AER on any ISA is the same whether interest gets paid monthly or annually.

innovate

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

Masomnia wrote: »

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

Someone definitely got the wrong end of the stick there. We won't ever know who it was :-)

Zero_Sum

innovate wrote: »

What I don't understand is why you would want monthly interest if you didn't intend to spend it. If you do intend to spend it, then there is a sound reason why they pay it straight into your current account - it is to save you from penalties that would be payable if you withdrew any money from a fixed term account before maturity (if indeed they would allow any withdrawals at all).

Some people may just prefer it, (I'm one of them). I've got a few fixed term bonds (non ISA) that i've got monthly interest & the interest is just added to the bond.

innovate

If you get your ISA interest paid out to your current account even though you have no immediate need for the money, you are losing out because the money has lost its tax-free status, and you won't be able to put it back into your ISA until you have an unfilled allowance (which could be next year).

If you look at it over several years, and use your full ISA allowance each year, having your interest paid monthly could well mean you will end up with significantly less money with your "monthly" approach.

If you want to keep the tax-free status on the interest, without it affecting your allowance, you can do that. Just choose the annual interest option.

If you aren't sure whether you would need to make a withdrawal sometime during a year from your ISA, chose an instant access ISA.

But whatever option you chose - - you will not get more interest in a single year if you get your interest paid monthly. At the end of 12 months, the interest will be exactly the same as you get if your interest is paid annually.

jamesd

innovate wrote: »

What I don't understand is why you would want monthly interest if you didn't intend to spend it.

Psychology. It's a regular monthly reminder of the reward you're getting for the savings.

innovate wrote: »

[*]you do not lose any money if you opt for annual interest. The AER on any ISA is the same whether interest gets paid monthly or annually.

It's true you don't lose money for annual interest but in an account like this one that pays interest outside the ISA for monthly interest the annual and monthly interest rates aren't the same because the interest outside compounds after tax while the annual compounds free of tax. Even if the interest is then paid into the ISA it'll be the after tax amount that compounds. Unless the ISA holder isn't a tax payer.

innovate

jamesd wrote: »

Psychology. It's a regular monthly reminder of the reward you're getting for the savings.

Just looked for the @psychology function in my Excel spreadsheet. It is not there. Do I need to install an upgrade (I am on V 12.0.6611.1000) ? Am I losing interest payments because I have a backlevel Excel?

jamesd wrote: »

It's true you don't lose money for annual interest but in an account like this one that pays interest outside the ISA for monthly interest the annual and monthly interest rates aren't the same because the interest outside compounds after tax while the annual compounds free of tax. Even if the interest is then paid into the ISA it'll be the after tax amount that compounds. Unless the ISA holder isn't a tax payer.

Surely what Nationwide pays out on interest monthly over a 12-month period is precisely the same amount of money as they will pay out in annual interest over the same period? As the AER is the AER, regardless of the frequency of interest payment.

I wonder how much interest 'Zero Sum' gets on the current account. Though would hazard a guess that it is substantially below the ISA interest rate, even if 'Zero Sum' is a non-tax payer. Most probably it is a big fat zero, since we are talking about Nationwide who haven't paid any interest on their Flexaccount ever since I took an interest in Flexaccounts (about 7 years ago now).

mania112

innovate wrote: »

Surely what Nationwide pays out on interest monthly over a 12-month period is precisely the same amount of money as they will pay out in annual interest over the same period? As the AER is the AER, regardless of the frequency of interest payment.

EDIT: Sorry I was making a different point, ignore me.

CLAPTON

in general, one good reason for monthly interest rather than yearly interest(all other things being equal), is that it is very very easy to see whether the interest rate hase been changed (bonus ended etc).

Linton

innovate wrote: »

Just looked for the @psychology function in my Excel spreadsheet. It is not there. Do I need to install an upgrade (I am on V 12.0.6611.1000) ? Am I losing interest payments because I have a backlevel Excel?



Surely what Nationwide pays out on interest monthly over a 12-month period is precisely the same amount of money as they will pay out in annual interest over the same period? As the AER is the AER, regardless of the frequency of interest payment.

...

It would seem not from the definition of AER described here. Unless I have missed something in the referenced document the rule for multiple interest payments in a year is :

A5. All interest paid is treated as if it is invested and earns a rate of interest equal to that being earned on the deposit.

So in the NW monthly interest case if they claim the same AER for both annual and monthly interest, the gross monthly interest received should be less than that for annual interest payments since it is not re-invested.

Please enlighten me if I'm wrong.