Interest paid into separate account

Cathcoo

Halfway through applying for Investec's one-year fixed- rate bond I was very disappointed to be given no option to have the interest paid into the account itself. This makes a significant difference to what you earn on the money right? Sorry if this question's a bit basic. I've searched everywhere and can't find the topic covered. The account is in MSE's top one-year savings bonds table.

badger09

Cathcoo wrote: »

Halfway through applying for Investec's one-year fixed- rate bond I was very disappointed to be given no option to have the interest paid into the account itself. This makes a significant difference to what you earn on the money right? Sorry if this question's a bit basic. I've searched everywhere and can't find the topic covered. The account is in MSE's top one-year savings bonds table.

If you are looking at the 1 year fixed rate bond, what difference does it make where the interest is paid?

At the end of the year your interest would be calculated and then either:

1) calculated, added to the original investment and the total returned to you
or
2) calculated, paid to your nominated account, and the original investment returned to you

Why do you think 'this makes a significant difference to what you earn'?

Kim_13

Taken from: https://www.moneysavingexpert.com/banking/interest-rates#save

"If interest is paid annually then the gross rate and AER should be the same, as there's no interest compounding.

Yet when interest is paid monthly, then the gross rate given is usually around 0.1% less than the AER rate. This is because if the monthly interest was left in the account, then there would be interest on the interest too. The AER makes sure this is included.

For an identical account, if interest was paid monthly it would be a 4.89% gross rate, but if interest was paid annually it would be 5% gross. Leave the money there over a year, though, and both would receive the same amount, as the AER for both is 5%."

You can see from the above that you'll only be losing out if you take the monthly interest option, as it won't get the chance to compound in the absence of the option to add interest to the account. But, if you could earn interest on the interest elsewhere, you could match or better the 1.9%, in which case it makes sense to take monthly interest.

If you take the annual option, you get back 1.9% on top of the amount you save.

To maximise your return, you should only opt for the monthly option if you can put the interest elsewhere where it will also earn 1.9% or more (The TSB Classic Plus current account at 3% or a Regular Saver account paying up to 5% are the obvious options for this. You may find this thread of interest: http://forums.moneysavingexpert.com/showthread.php?t=5776240.

If the monthly interest option is taken and the interest not earning interest as above, the gross rate is 1.88%, taken from the Investec site: https://www.investec.com/en_gb/savings-accounts/access-after-a-fixed-term.html

ValiantSon

Kim_13 wrote: »

Taken from: https://www.moneysavingexpert.com/banking/interest-rates#save

"If interest is paid annually then the gross rate and AER should be the same, as there's no interest compounding.

Yet when interest is paid monthly, then the gross rate given is usually around 0.1% less than the AER rate. This is because if the monthly interest was left in the account, then there would be interest on the interest too. The AER makes sure this is included.

For an identical account, if interest was paid monthly it would be a 4.89% gross rate, but if interest was paid annually it would be 5% gross. Leave the money there over a year, though, and both would receive the same amount, as the AER for both is 5%."

You can see from the above that you'll only be losing out if you take the monthly interest option, as it won't get the chance to compound in the absence of the option to add interest to the account. But, if you could earn interest on the interest elsewhere, you could match or better the 1.9%, in which case it makes sense to take monthly interest.

If you take the annual option, you get back 1.9% on top of the amount you save.

To maximise your return, you should only opt for the monthly option if you can put the interest elsewhere where it will also earn 1.9% or more (The TSB Classic Plus current account at 3% or a Regular Saver account paying up to 5% are the obvious options for this. You may find this thread of interest: http://forums.moneysavingexpert.com/showthread.php?t=5776240.

If the monthly interest option is taken and the interest not earning interest as above, the gross rate is 1.88%, taken from the Investec site: https://www.investec.com/en_gb/savings-accounts/access-after-a-fixed-term.html

If it is a one year fixed rate savings bond then there isn't going to be an option for interest to be saved monthly and there will be no access to the principal either. You are getting the higher rate by agreeing to lock that money away for one year.

OP, there is no compounding of interest because the bond only lasts for one year. You will get the full 1.88%. It doesn't matter that the interest is paid into another account.

Kim_13

ValiantSon wrote: »

If it is a one year fixed rate savings bond then there isn't going to be an option for interest to be saved monthly and there will be no access to the principal either. You are getting the higher rate by agreeing to lock that money away for one year.

OP, there is no compounding of interest because the bond only lasts for one year. You will get the full 1.88%. It doesn't matter that the interest is paid into another account.

According to the MSE guide and Investec's site, there is a monthly interest option. Here is the link to the MSE guide where the product is listed: https://www.moneysavingexpert.com/savings/savings-accounts-best-interest#fixedsavings

ValiantSon

Kim_13 wrote: »

According to the MSE guide and Investec's site, there is a monthly interest option. Here is the link to the MSE guide where the product is listed: https://www.moneysavingexpert.com/savings/savings-accounts-best-interest#fixedsavings

Thanks.

Hmmm, interesting.

If there is another account to put it in to earn more interest, then you might as well take the monthly interest and move it into that account, thus increasing the yield to above 1.88%.

alanq

Current interest rates on offer for Investec 1-year Fixed Term Deposit
1.88% AER monthly 1.90% AER annual

So if interest were paid monthly back to the account it would total less than if paid once on maturity. Monthly interest is only worthwhile if you need it to spend it or can get a better return elsewhere.

https://www.investec.com/en_gb/savings-accounts/get-started/interest-rates.html

Cathcoo

Thanks Kim, I suspected as much :T

Cathcoo

Thanks all! That's really helpful. I'm a bit of a newbie, so being really cautious. I liked the cut of Investec's jib - easy application process, good ethics and corporate governance - but want to make sure I'm getting value for money.