Tesco new 1.35% rate (including bonus) Internet saver

eskbanker

hoc wrote: »

colsten wrote: »

Unless you need to actually spend the interest each month, there is really no logical argument for settling for a lower AER simply because interest is paid monthly.

The logical argument is to ensure interest is spread evenly to avoid big variation in taxes assessed from April to April. If the money isn't withdrawn and interest compounds the result is the same. When the option exists, monthly interest is the better choice.

The more recent posts on this thread all seem to have stemmed from this misunderstanding (or wilful ignoring) of the logic of colsten's point (which I'd also made a bit earlier), the key aspect of which was 'why pick a lower AER for the sake of monthly interest' rather than the different issue of whether monthly or annual is better where the AER is equal.

18cc

Is monthly interest a lower AER? I know the difference is probably because of the effects of not having compound interest (ie interest on your interest because you withdraw it every month) but not sure if that's correct.

eskbanker

18cc wrote: »

Is monthly interest a lower AER? I know the difference is probably because of the effects of not having compound interest (ie interest on your interest because you withdraw it every month) but not sure if that's correct.

Not sure I'm really understanding your question as phrased but the point of AER is to allow a harmonised comparison by taking into account the effect of compounding interest that's paid monthly (but not withdrawn), so, for a given set headline AER, monthly interest will be expressed as a slightly lower gross rate than the annual version but ultimately giving the same interest over the year because of that compounding.

See https://www.moneysavingexpert.com/banking/interest-rates#AER....

18cc

Thanks that helps - so the bottom line is that it doesn't matter if you choose monthly or annual rate from a gain point of view. you just miss out on the interest on your interest (because you have withdrawn and spent it).

pavane

A lot of confused bunnies here.


The comments on AER are hilarious. Contradicting oneself in the same paragraph. Tis the season so I won't quote them to give you a chance to edit to save face.


TLDR version is go with monthly unless you want to influence the tax year as explained.

18cc

yes some people do find other people's confusion funny - I personally have never got much pleasure at laughing at other people's mistakes i usually try to help

pavane

18cc wrote: »

yes some people do find other people's confusion funny - I personally have never got much pleasure at laughing at other people's mistakes i usually try to help

It was not your confusion I found funny. You are the only one in recent exchanges without egg on your face. hoc and Malchester speak the truth and others are now trying to dig out finding caveats and weaseling out on semantics. It was the righteous one confusing you with contradictory comments which you exposed I found funny. We go from "why would you pick lower AER" to "monthly AER is lower but it works out the same if you don't withdraw".

18cc

No that's fine wasn't really trying to get at you I was just a bit confused with all the different posts

I had always assumed that if an account for example paid 1.5% annually and 1.45 monthly that even though it appeared to be a lower rate the rates were in fact exactly the same it's just that you weren't getting interest on interest

By the way just in case anybody doesn't know - for fixed term bonds the interest is taxed in the year that it becomes spendable so a five year bond for example even if the interest is shown on the statements each year the tax treatment is that it doesn't get taxed until year five because that's the only time you can access it

unless of course you are allowed to access it but pay a penalty (eg ns&i bond) in which case that does count as accessable and so you should declare the tax each year

Confusing or what!

18cc

Ok I am more than happy to be corrected but this is not what articles like this say

https://www.google.co.uk/amp/www.telegraph.co.uk/money/ask-a-money-expert/when-does-the-interest-on-my-fixed-rate-bond-contribute-to-my-pe/amp/

antrobus

IanManc wrote: »

The part I've highlighted isn't correct.

There is nothing in tax law about interest received becoming "spendable".

Tax is due in the tax year that the interest is added to your account irrespective of whether or not you can withdraw it.

So, to use your example, for a five year bond the interest gets taxed in each tax year in which it was added to your account, even though you can't get your hands on the capital or the interest until the end of the term.

HMRC says otherwise.

According to HMRC, it does not matter when the interest is credited to your account. Rather, it boils down to when the interest is made available or when it becomes free to withdraw. This is an important feature of fixed term savings accounts as not all permit access.

An HMRC spokesman said: “In general, interest counts towards a saver's PSA when it 'arises' - that is when it is received, or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw.”

http://www.telegraph.co.uk/money/ask-a-money-expert/when-does-the-interest-on-my-fixed-rate-bond-contribute-to-my-pe/

The part you have highlighted is, in fact, correct. (More or less.)