Frequency of savings interest payments

david72

Why do there seem to be so few savings accounts which pay you interest on a monthly or quarterly basis, rather than annually?

I know that you tend to lose out slightly (because of tax payments) the more frequently interest payments are made, but I'm sure many people would nevertheless like the benefit of seeing their savings grow on a more frequent basis (and of having access to that interest earlier). It would seem to me that the option of quarterly interest payments would be a good compromise between frequency and tax-efficiency, yet I'm not aware of any accounts that offer this.

RayWolfe

Lots of admin needed for monthly payments (12 times as much as annual).

isofa

All account monthly rates are lower than their yearly rates because of the frequency of payment, but you don't loose out at all! When then monthly rate is compounded over the 12 month period it should equal exactly the same as their yearly rate, shown in the AER - Annual Equivalent Rate. The AER is the rate you should use to compare accounts from different companies.

Therefore it makes no difference when you get the interest, unless you want to peel off the interest into another account or spend it, there really isn't any advantage going monthly.

It costs the banks more to update accounts monthly rather than yearly, (systems, admin, letters etc) and introducing a new scheme to do this quarterly would be just as costly, hence why it isn't offered.

CLAPTON

Although it makes little difference in practice there is in fact a small difference in the actual interest earned between the two scenerios if you pay tax.

This is because, if paid annually they only deduct the tax at the year end whereas if you are paid part way through the year the tax is deducted as you go so there is a small compounding difference.

The cost of system between the two scenerios is pretty insignificant as they work out interest on a daily basis anyway.

And just for the record the Barclays esaver pays quarterly interest.

anticlaus105

isofa wrote: »

All account monthly rates are lower than their yearly rates because of the frequency of payment, but you don't loose out at all! When then monthly rate is compounded over the 12 month period it should equal exactly the same as their yearly rate, shown in the AER - Annual Equivalent Rate. The AER is the rate you should use to compare accounts from different companies.

Therefore it makes no difference when you get the interest, unless you want to peel off the interest into another account or spend it, there really isn't any advantage going monthly.

It costs the banks more to update accounts monthly rather than yearly, (systems, admin, letters etc) and introducing a new scheme to do this quarterly would be just as costly, hence why it isn't offered.

EDIT: already been answered.

exel1966

isofa wrote: »

there really isn't any advantage going monthly

But it is nice to check your account each month to put a smile on your face and see how much your balance has grown

Milarky

I've found that some accounts (maybe all of them) that pay interest monthly round up to the nearest penny. Thus an account paying an indifferent '5% AER' (4.89% Gross) for instance will earn '0.51p' - rounded up to 1p 'gross' each month - and no tax is deducted.

£1.25 --> £1.37 in one year 10.96%!

This is one instance where monthly compounding works better than annual!

isofa

Interesting... It is relatively easy to set-up a spreadsheet to calculate this to work out which is best, so might be worth a try!

I thought the whole point of a displayed AER is to show what the equivalent rate is if a monthly rate was paid yearly, but if some are receiving slightly more monthly, then it might need further analysis

McSaver

monthly or yearly interest will pay the same AER over a year.

the advantage of monthly interest is you get frequent payments on your savings which can be used to watch your savings grow (less boring method on monthly interest), or can be used as an income.

the advantage of yearly interest is that you will receive 1 larger payment rather than 12 smaller payments (except its boring cos you only get 1 interest paymentevery year).

Moggles_2

Originally Posted by Milarky
I've found that some accounts (maybe all of them) that pay interest monthly, round up to the nearest penny.

Really? Do tell us which ones?

isofa

Interesting follow up thread here, with calcs and discussions that yearly is indeed better for tax-payers... http://forums.moneysavingexpert.com/showthread.html?t=527642