Interest Calculation

buffman

There is no more information than this. The product was not on sale to the general public but is the result of a settlement of a dispute. Hence I cannot/have not disclosed the bank in question. I just want to verify their numbers!! The balance in question is significantly larger than mentioned but everything else is correct.

bsms1147

buffman wrote: »

There is no more information than this. The product was not on sale to the general public but is the result of a settlement of a dispute. Hence I cannot/have not disclosed the bank in question. I just want to verify their numbers!! The balance in question is significantly larger than mentioned but everything else is correct.

The plot thickens.

bsms1147

Eco_Miser wrote: »

They need a formula to work out.

and that's not the formula.

You need the fourth root of 1.03 to get the quarterly interest rate, subtract 1, multiply by .8 to deduct tax at 20%, add 1 again, and raise to the 8th power (for 2 years in quarters), then multiply by the principal (1000) for the final balance.
Which is what PeacefulWaters did.

If there's no tax, then the OP's original calculation is correct.

For 5 years at 5.01 gross paid net of 20% tax quarterly, the total would be £1220.67

Does the AER not already account for the fact it is paid quarterly?

: embarassedsmilieifcompletelywrong :

Eco_Miser

bsms1147 wrote: »

Does the AER not already account for the fact it is paid quarterly?

: embarassedsmilieifcompletelywrong :

It does, but ignores the tax, so if tax is deducted you need to recalculate.

buffman

Eco_Miser wrote: »

They need a formula to work out.

and that's not the formula.

You need the fourth root of 1.03 to get the quarterly interest rate, subtract 1, multiply by .8 to deduct tax at 20%, add 1 again, and raise to the 8th power (for 2 years in quarters), then multiply by the principal (1000) for the final balance.
Which is what PeacefulWaters did.

If there's no tax, then the OP's original calculation is correct.

For 5 years at 5.01 gross paid net of 20% tax quarterly, the total would be £1220.67
1000*(1+(0.8*0.0501/4))^20) since the compounding is quarterly.

Thanks, Eco Miser. Your formula/calculation agrees with the figure that I have.

The total interest over the five years is significantly higher if the tax is all deducted on maturity rather than quarterly (though it may push me into a higher tax band if all paid at once).

Eco_Miser

buffman wrote: »

The total interest over the five years is significantly higher if the tax is all deducted on maturity rather than quarterly (though it may push me into a higher tax band if all paid at once).

Yes, but since the tax has to be deducted when the interest is paid, you wouldn't get the compounding if the tax were taken at the end.

polymaff

buffman wrote: »

There is no more information than this. The product was not on sale to the general public but is the result of a settlement of a dispute. Hence I cannot/have not disclosed the bank in question. I just want to verify their numbers!! The balance in question is significantly larger than mentioned but everything else is correct.

Never mind, then. Just bear in mind that AER is just an invention that allows you to compare accounts. It is not the figure used during the bank's calculation of the interest, although it can be used to estimate, simply - but approximately, what your account will yield, before tax, at the end of a year - providing that any interest payments generated during the year have been instantly credited back into the account as interest-earning funds.

polymaff

buffman wrote: »

Thanks, Eco Miser. Your formula/calculation agrees with the figure that I have.

The total interest over the five years is significantly higher if the tax is all deducted on maturity rather than quarterly (though it may push me into a higher tax band if all paid at once).

Yes, but is this the case? Have you been receiving annual tax certificates from the bank - often known as an s975 - showing how much tax has been paid on your behalf that past year?

polymaff

Eco_Miser wrote: »

Yes, but since the tax has to be deducted when the interest is paid, .... .

Yes, but do we know the terms of this bespoke account? We do not!

schiff

polymaff wrote: »

A kiddy puts £9.50 in a "Smart Junior ISA" with a 3.25% AER. At the end of the year, said kiddy expects 3.25% of £9.50 - and, apparently, actually receives just under 3.08%?

Quote Nationwide:

"A great rate of 3.25% AER tax-free variable

Smart pays the same interest rate on every pound in your account, making saving simpler"


Live and learn!

I know it's not Nationwide, but I've just tangled with this on a TSB Classic Plus account. I queried the amount of monthly interest just credited on the account, which is advertised as 5% AER. Only to find it's actually calculated at 4.89%.