5% Savings Loophole

phillw

Eco_Miser wrote: »

Which is paying simple interest at a rate of 6% per year (or ½% per month) for the length of time the money is deposited.

Yes, I thought that was clear from the calculations.

Calculating the interest is essentially 6% of month 1 deposit (it receives 0.5% interest 12 times), 5.5% of month 2 deposit (it receives 0.5% interest 11 times) etc. Because it's simple interest you can work it out like this or 0.5% of the balance in the account. But I find it easier to think of like this because you're not having to calculate the balance for each month.

In a 3% current account it receives interest 365 times at a rate of 3/365, but for simplicity I assumed it was done monthly as the interest is only compounded at the end of the month but they calculate the interest daily to take into account balance fluctuations. It should average out over the year, but rounding different length months and rounding will affect it to some extent.

Eco_Miser wrote: »

When interest rates are quoted as a percentage without specifying a period, one year is assumed, NOT the period over which the money is deposited.

They do specify the period (AER=annual equivalent rate).


"It offers a fantastic 6.00% AER (gross 6.00% pa), and you can save £25 to £300 per month for a fixed term of 12 months – up to a maximum of £3,600 each year."


I've never seen an account where you would get 6% whether you deposited the cash for one month or one year. Old accounts may have worked like that, old mortgages had interest calculated yearly for example.


You can drop the payments to the minimum and start paying into a M&S 6% account after six months if you want to squeeze the interest. Or if you have enough cash to fund both at once then open them both at the same time.


It really is better off to fund them as much as you can afford, even if it means raiding your 3/4/5% current accounts.

gazwaldo8

This doesnt get any simpler does it? :-/

colsten

gazwaldo8 wrote: »

This doesnt get any simpler does it? :-/

It only doesn't get any simpler because some people keep claiming that the interest rate is different in different months and other such hilariously wrong stuff.

As previously explained, the interest rate applicable to the currently available FD Regular Saver is 6.00% AER (gross 6.00% pa) fixed for 12 months (see FD website for confirmation). It never becomes 3% or 4.57% or any other percentage - it's stays at 6% AER/gross. Of course you do not get 365 days worth of interest for money that is in the account for, say, 30 days only. But you still get 30 days worth at 6% gross for such money.

The basic method of calculating interest is the same as for any other account that pays, or charges, interest. See one of my earlier posts for a sample calculation.

masonic

I am quite simply dumbfounded by the ability of some people to make things look so much more complicated than they actually are.

saintalan

gazwaldo8 wrote: »

This doesnt get any simpler does it? :-/

Hi gazwaldo8, your right this doesn't get any simpler but it does get easier if you let it!:)

Cheers

Alan

phillw

colsten wrote: »

It only doesn't get any simpler because some people keep claiming that the interest rate is different in different months and other such hilariously wrong stuff.

The interest rate isn't different, but the return is different for the deposit made in each month. You get a 6% return on the month 1 deposit, 5.5% return on the month 2 deposit etc.

The calculation comes out the same way if you use a balance and take 0.5% each month, but that is harder to calculate at the time you need to make the decision how much to save each month.

If you only have 300 pounds spare income each month and in month 4 you have the opportunity to invest somewhere and you can get a return of more than 4.5% over eight months somewhere else then you should put 25 in to the regular saver as your alternative investment will outperform it, otherwise you put 300 into the regular saver.

If funding your regular saver will cause you to drop an interest tier in your current account, you need to know what the effect of each transaction you make today is. The past decisions are irrelevant as the cash is now locked away.

Calculating it the long way round to avoid people misunderstanding and making fun of you on forums is a waste of time.

colsten wrote: »

It never becomes 3% or 4.57% or any other percentage - it's stays at 6% AER/gross. Of course you do not get 365 days worth of interest for money that is in the account for, say, 30 days only. But you still get 30 days worth at 6% gross for such money.

That is why you need to calculate what the return will be for each deposit. The rates I gave are what the actual return is, which is all that is important. You can go on about AER/gross all you want but if you make 12 identical payments into a first direct regular saver the interest you receive will be 3.25% of the total deposits.

If you get confused thinking that this means I'm saying the AER is 3.25% then I can see where the issue is. I didn't claim the AER or the APR (or any other rate they make up to make comparisons "easier") changed.

We're not the regular saver that they are aiming the accounts at, like we're not the current account customer they are targeting with switching bonuses and interest on current accounts.

We're likely to have 3600 sitting in a current account earning interest and need to decide whether locking it away in a 4% AER fixed ISA for a year, overpaying your mortgage or putting it in a 6% regular saver. Knowing that the regular saver will only allow you to grow your money by 3.25% before tax is important, also knowing what the money will make while it's drip feeding into the current account is important too. So is being able to recognise when you should change your strategy. Comparing the AER's/APR's doesn't really help you. Knowing that in month 11 the £300 you're about to pay is going to give you 1% (£3) when you could use it to buy something that you sell on at 5% profit does help you. Similarly knowing that in month 2 you're going to make 5.5% so it doesn't make sense helps you.

Also it's not 30 days, first directs regular saver uses calendar months. I've not found an online calculator that matches the example on first directs web site, but mine does.

masonic wrote: »

I am quite simply dumbfounded by the ability of some people to make things look so much more complicated than they actually are.

Some people don't recognise simplicity. They want to make it harder to work out by dumbing it down. Sometimes the headline interest rates are irrelevant, like quoting the APR on a two week loan or a 25 year mortgage with a cheap 2 year deal. Similarly AER on regular savings accounts are only useful for comparing against other regular savings accounts.

masonic

phillw wrote: »

If you only have 300 pounds spare income each month and in month 4 you have the opportunity to invest somewhere and you can get a return of more than 4.5% over eight months somewhere else then you should put 25 in to the regular saver as your alternative investment will outperform it, otherwise you put 300 into the regular saver.

If you can get a return of more than 4.5% over 8 months, then you should ignore 6% regular savers completely until such time as that return is no longer available to you, or drop to the minimum payment immediately regardless of what month you are in with the regular saver. The former is a better rate. but I don't think you'll find a risk-free savings product where you can get that return.

Some people don't recognise simplicity.

So I gather.

masonic

phillw wrote: »

That is why you need to calculate what the return will be for each deposit. The rates I gave are what the actual return is, which is all I care about. You can go on about AER all you want but if you fully fund a first direct regular saver the interest you receive will be 3.25% of 3600.

You seem to be completely overlooking the fact that if you are paying money into a RS in month 10 or 11 or 12, the money is available again in 1, 2 or 3 months to earn interest elsewhere, so if you are doing this sort of calculation, you need to look over the same time period. So, say you are considering whether you will get a better return from paying into a 6% regular saver with 2 months to go or a 5% current account, well the monthly returns are essentially proportional, 6% AER gives you more interest than 5% AER over 1, 2, 3 or more months.

saintalan

Just finishing up my merrygoround!

All DDs finally sorted, just need to check funding.

Can anyone confirm or correct the following.

1 Nationwide FD has to have external bank funding
2 TESCO, BoS & Lloyds can fund from personal a/cs within. Actually have matching OH a/cs too.
3 Santander can be within Santander but from another's a/c.

Many Thanks

Alan

masonic

saintalan wrote: »

Can anyone confirm or correct the following.

I believe you have it right, but aren't you planning to scrutinise the T&Cs of each account so that you don't have to rely on what an anonymous stranger tells you?