5% Savings Loophole

Romburner

Interest is calculated daily and added monthly (I believe calculated on the 1st of each month with Lloyds). Each day in effect has the 5%^(1/365). So, each month may have different days (28/29/30/31) which will affect the interest.

If you didn't have the full 5K in then the differences would be more pronounced (albeit pennies) as you would have compounding as well (interest on the previous interest).

masonic

Romburner wrote: »

Interest is calculated daily and added monthly (I believe calculated on the 1st of each month with Lloyds). Each day in effect has the 5%^(1/365). So, each month may have different days (28/29/30/31) which will affect the interest.

If you didn't have the full 5K in then the differences would be more pronounced (albeit pennies) as you would have compounding as well (interest on the previous interest).

Not quite. The daily rate (assuming non-leap year) is 1/365 of the gross rate. Interest is compounded monthly, not daily.

Romburner

I am not quoting the gross rate I was dealing with the AER which you will find if you wish to be truly accurate it is actually (assuming non leap year) the 365th root of the AER. or if you want to put in a spreadsheet you would do Amount * (1.05^(1/365)). I think you will find I'm correct there. However, the way you quote will give a very similar answer as we are talking about fractions of a percentage point per day.

As to the compounding, If they have the full 5K in the account there will be no compounding as interest is only paid on the 5K any surplus is at 0% anyway. I did not specify whether the compounding was done daily or monthly, you have assumed that.

masonic

Romburner wrote: »

I am not quoting the gross rate I was dealing with the AER which you will find if you wish to be truly accurate it is actually (assuming non leap year) the 365th root of the AER. or if you want to put in a spreadsheet you would do Amount * (1.05^(1/365)). I think you will find I'm correct there. However, the way you quote will give a very similar answer as we are talking about fractions of a percentage point per day.

As to the compounding, If they have the full 5K in the account there will be no compounding as interest is only paid on the 5K any surplus is at 0% anyway. I did not specify whether the compounding was done daily or monthly, you have assumed that.

No, sorry, you are incorrect. Interest is only compounded when it is paid and it is not paid daily. Taking the 365th root assumes it has been compounded daily.

I suggest you familiarise yourself with the equations here:
https://www.bba.org.uk/policy/retail/savings-and-investment/cash-savings-accounts/calculation-of-the-annual-equivalent-rate-aer/
Particularly d) Where interest is payable more frequently than annually. Note, n in that equation is not equal to 365 when interest is paid monthly.

Romburner

Really.... Life is too short...

masonic

Romburner wrote: »

Really.... Life is too short...

Which is why the banks provide us with both the gross rate and the AER... So that nobody has to rearrange equations or calculate nth roots.

Eco_Miser

Because you are paid a daily rate and Lloyds 'months' vary between 28 (or less) days and 34. Months never end on a weekend or bank holiday.

Romburner

My comment was life is too short to argue the toss with you. I shall leave it at that.

masonic

Romburner wrote: »

My comment was life is too short to argue the toss with you. I shall leave it at that.

Well, yes, I got that, but I decided to be a little disingenuous with my last comment. I've been around these parts long enough to recognise the sight of toys being thrown out of the pram.

colsten

Romburner wrote: »

I am not quoting the gross rate I was dealing with the AER

Banks always use the gross rate, never the AER, to calculate the interest.