Interest Payment Types - Choosing between fixed rate bonds

bowlhead99

londoninvestor wrote: »

This is where I think I'm still confused - I can only reconcile "Gross rate 2.24%, AER 2.24%" with a picture where one year's interest is credited (but not released) after a year, and so the second year's interest is 2.24% of the principal plus accrued interest.

Well, maybe that is what is happening. You could view it that you have bought into a product getting a gross rate of 2.24% p.a. which the terms say will be compounded annually but you can't have it back until exactly two years from now; or that you are getting 0% for a year and then 4.53% for a year. Either way, what you end up with after two years is £453, which is equivalent to getting 2.24% 'annual equivalent rate'.

Ultimately it doesn't matter because you can't access it until the two years is up; it's effectively their money, being used in their business under their control, until you're allowed to have it back at the maturity date, at which point they'll make it available to you.

londoninvestor wrote: »

PS for some further context - we've discussed on a number of previous threads that if interest is credited annually, even if it's not paid until maturity, then it's taxable year by year as it's credited: illustration.

Following your link, that may be a misconception/ simplification; interest is taxable when it arises, ie when paid or made available. It's clear that an important distinction from the HMRC spokesperson is that : it's not taxable simply when *credited*, but only when *made available*; i.e. credited to an account on which the account holder is free to draw.

So for example an NS&I savings bond for a three year term, the interest may be considered to arise annually even if you don't touch it, because they credit the product with interest each year and if you want to take the money away, you can pay them a penalty to apologise for the inconvenience and just run off with the money (including the interest). So it's not practically 'paid' to you but it's credited to an account you can take it out from if you want.

Whereas with an account that only gives you access on maturity, you are not free to take the money away until the end, so in the interim it has not really been paid, made available to you etc. You're treated as receiving it when you can get your hands on it, transfer it or use it for something.

londoninvestor

bowlhead99 wrote: »

Well, maybe that is what is happening. You could view it that you have bought into a product getting a gross rate of 2.24% p.a. which the terms say will be compounded annually but you can't have it back until exactly two years from now; or that you are getting 0% for a year and then 4.53% for a year. Either way, what you end up with after two years is £453, which is equivalent to getting 2.24% 'annual equivalent rate'.

Agreed - as the quoted AER is consistent with the amounts in the "product summary box" you quoted then I'd be confident of getting that and could regard the "gross" number as moot.

Ultimately it doesn't matter because you can't access it until the two years is up; it's effectively their money, being used in their business under their control, until you're allowed to have it back at the maturity date, at which point they'll make it available to you.

bowlhead99 wrote: »

Following your link, that may be a misconception/ simplification; interest is taxable when it arises, ie when paid or made available. It's clear that an important distinction from the HMRC spokesperson is that : it's not taxable simply when *credited*, but only when *made available*; i.e. credited to an account on which the account holder is free to draw.

This makes logical sense - what was sticking in my mind though is the kind of points made on threads like this and this. Particularly xylophone's point that in the days of deducting tax at source and paying interest net, interest credited annually to a multi-year bond (even if it couldn't be withdrawn) would have tax deducted in the year of crediting.

I have probably taken this way off-topic now, and into territory that is already covered by those several threads. Sorry JohnRooney!