Monthly vs. annually paying ISA (Virgin Money)

Jew

I have a question about annual paying and monthly paying e-ISAs...

For example, the Virgin one can be set to pay monthly or annually — when I use the calculator on their site, it tells me that with the monthly one, I can save more than with the annual.

I always thought that annual paying had higher rates?

Is this to do with compounding interest, where the interest I earn each month accumulates new interest further down the line? But with the annual it happens only once a year?

How does this work?

Thanks.

CLAPTON

I would guess it's to do with rounding on the monthly interest.. they probably round up to the nearest pence

Jew

If I put in £1000, then:

ANNUAL
Estimated interest £28.50 AER1 / Tax-free3 P.A.

MONTHLY
Estimated interest £28.57 AER1 / Tax-free3 P.A.

So monthly makes more dough?

innovate

Lots of other threads about the same subject. e.g. https://forums.moneysavingexpert.com/discussion/4193279

pqrdef

It's only rounding error. They aim to match the interest as closely as possible, but the percentages are given to a hundredth of a percent. To get an exact match between annual and monthly, they'd need a couple more decimal places. But if they quoted interest rates to 4 decimal places, people would think they'd gone mad.

psychic_teabag

Normally, the monthly rate is reduced by enough to compensate for the effect of compounding, so that the AER is the same. But the calculation is never exact.

By my reckoning,
2.82% monthly is 2.857% AER
2.81% monthly is 2.846% AER
so I guess they chose the slightly more generous rate.

So yes, you're slightly better off with monthly interest. But AER is only relevant when the money in for exactly a year. For the same AER, I reckon annual interest is slightly better if the money isn't in for exactly a year. Not sure how it would work out in this case when monthly rate is very slightly higher.

Jew

Thanks! That answers it!

thenudeone

psychic_teabag wrote: »

But AER is only relevant when the money in for exactly a year. For the same AER, I reckon annual interest is slightly better if the money isn't in for exactly a year.

Yes it is.

Banks nearly always set the interest rates so that the same amount of interest in £ is earned in either account in a full year.

The interest rate is lower on a monthly account, but the balance on which the interest is earned rises slowly through the year, as each month's interest is added. So in the first half year you'll earn slightly less than half the full year's interest, and in the second half year slightly more than half.

If you close an annual-interest account half-way through the year, however, you'll simply get half the annual interest figure, so you're slightly better off.

psychic_teabag wrote: »

Not sure how it would work out in this case when monthly rate is very slightly higher.

Probably with a spreadsheet, but the differences will be pretty small unless you have £££££s to invest.

Jew

thenudeone wrote: »

Yes it is.

Banks nearly always set the interest rates so that the same amount of interest in £ is earned in either account in a full year.

The interest rate is lower on a monthly account, but the balance on which the interest is earned rises slowly through the year, as each month's interest is added. So in the first half year you'll earn slightly less than half the full year's interest, and in the second half year slightly more than half.

If you close an annual-interest account half-way through the year, however, you'll simply get half the annual interest figure, so you're slightly better off.



Probably with a spreadsheet, but the differences will be pretty small unless you have £££££s to invest.

Thank you!

Anddos

could i open 2 isa's at the same time, i have a saving of 8'500, how much interest per month am i looking at?

the plan would be this

isa 1 = 5,500
isa 2 = 3000

can i make 2 isa's at the same time?

mania112

Jew wrote: »

I have a question about annual paying and monthly paying e-ISAs...

For example, the Virgin one can be set to pay monthly or annually — when I use the calculator on their site, it tells me that with the monthly one, I can save more than with the annual.

I always thought that annual paying had higher rates?

Is this to do with compounding interest, where the interest I earn each month accumulates new interest further down the line? But with the annual it happens only once a year?

How does this work?

Thanks.

Assuming the annual figure is AER too, it can only be a rounding thing.

If I understand it correctly, if you're paying into a stocks and shares ISA you will benefit from Pound Cost Averaging, if you're paying in monthly.