AER does not (seem to) match what bank says will be in account after 1 year [Help!]

bowlhead99

AntiqueSquid wrote: »

To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.

You cannot find where it says monthly interest is paid... because monthly interest is not paid.

At the end of the year they work out how much money you are owed, and pay it. They couldn't tell you today how much you would earn in any one particular month because they don't know how much you would have chosen to have put into the account by that point. And they are not going to pay you out as you go along anyway, they are going to pay you at the end.

What they can say is that if you paid the max on day one and kept putting in the next monthly amount as soon as you were allowed, the max you could earn over the year is £x.

As different accounts have different terms and funding timescales, and some pay monthly letting you earn interest on the interest in the account, and some just build it up and pay it at the end, the regulator has said everyone should present their figures with a standard methodology. That's the "annual equivalent" rate. The effective annual rate you would get on money in that account if you kept it in there for a full year and it was all paid once annually.

In other words,
The first £300 would get 5% if you left it in the account for a year, and it does. (5%, £60).

The next £300 would get 5% if you left it in the account for a year, but you don't. When the payout date / account closure comes around, the second £300 hasn't been there a year so it can't get the whole 5%, £60, you get some lower number instead. You can still call it a 5% account though, cos that's what money on the account earns for every year it's in there.

There's no need for them to tell you all the possible amounts of money you might earn for every potential funding schedule you might have. 5%AER is fine, so you can compare it to other accounts and see if that's higher or lower than what those other accounts would pay on money in them. If like many people you are drip feeding monthly you will be earning interest at rate 'a' on some of your money and interest at rate 'b' or rate 'c' or rate 'd' on other chunks of money for a given month.

AntiqueSquid

Thank you all for your input.

I will explain that "interest calculated daily" to me meant they check daily to prevent you taking money out yet getting interest on the old amount. i.e they check on the 4th, you have £5,000, but pay interest on the 8th, by which point you had already moved the money to a different account to play the system. I simply assumed this was the purpose of "interest calculated daily".

The fact it said "paid at the end of the year" did not aid my thinking.

I'm sure you can understand where my confusion came from. Now that I have been informed, I will not make the same error again.

Personally, it would be nice if on the websites they explained the 12/12 5% 11/12 5% etc... but alas they do not.

Thanks again all.

tangerine2

Just found this thread as I was expecting 6% interest on the £3000 I put in over the last year and only received £96.80 interest when I was expecting £180. Der, that was never explained to me but I can see it now, thanks for explaining. Is it worth taking out another one!

bowlhead99

tangerine2 wrote: »

Just found this thread as I was expecting 6% interest on the £3000 I put in over the last year and only received £96.80 interest when I was expecting £180. Der, that was never explained to me but I can see it now, thanks for explaining. Is it worth taking out another one!

Yes, it is worth taking out another one.

You will have been earning "6% a year" (which is around half a percent a month, or a bit less than 0.02% a day) of interest on the money that is in the regular savings account ; and the money that is not yet in the regular savings account (because of being restricted to how much you can put in per month) will have been earning whatever rate it gets in that other place. That 'whatever rate it gets in the other place' is going to be less than 6% because 6% is the highest rate in town.

So, even if you can't get all your savings into that regular saver account on day one because there is a limit to how much they'll accept per month... clearly it is better to be getting interest at a nice high rate of 6% per year in an account on some of your money, than not using the account and not getting as much as 6% on any of your money. You will get more total interest on your savings by using the account than not using the account.

So in month 1 you would have £250 in the regular saver account earning 6% per year, and you'd have some money at a lower rate that can't fit in the regular saver. If the alternative is to not bother opening the regular saver account at all, and have *all* your money at the lower rate, then obviously you won't make as much interest as you'd make if you accepted 6% on a chunk of your money.

So yes, if your special regular saver rate is coming to an end, open another one. Although generally the top regular savers are only 5% a year these days instead of 6%.

tangerine2

bowlhead99 wrote: »

Yes, it is worth taking out another one.

You will have been earning "6% a year" (which is around half a percent a month, or a bit less than 0.02% a day) of interest on the money that is in the regular savings account ; and the money that is not yet in the regular savings account (because of being restricted to how much you can put in per month) will have been earning whatever rate it gets in that other place. That 'whatever rate it gets in the other place' is going to be less than 6% because 6% is the highest rate in town.

So, even if you can't get all your savings into that regular saver account on day one because there is a limit to how much they'll accept per month... clearly it is better to be getting interest at a nice high rate of 6% per year in an account on some of your money, than not using the account and not getting as much as 6% on any of your money. You will get more total interest on your savings by using the account than not using the account.

So in month 1 you would have £250 in the regular saver account earning 6% per year, and you'd have some money at a lower rate that can't fit in the regular saver. If the alternative is to not bother opening the regular saver account at all, and have *all* your money at the lower rate, then obviously you won't make as much interest as you'd make if you accepted 6% on a chunk of your money.

So yes, if your special regular saver rate is coming to an end, open another one. Although generally the top regular savers are only 5% a year these days instead of 6%.

Thank you for the explanation and advice. Yes the interest is now 5% - the most I can save is £250 a month but as you suggest, any interest is better than nothing.

katejo

tangerine2 wrote: »

Thank you for the explanation and advice. Yes the interest is now 5% - the most I can save is £250 a month but as you suggest, any interest is better than nothing.

I have one of these with FD which is just about to pay out. I know how much to expect but really wish I could pay a bit extra in each month.