Is interest on savings always calculated once a year?

reg091

I can't get my head around this, maybe you can help! Scenario: if I pay £100 per month into my childs JISA (3.25% interest) and say they caclulate interest every September then the £500 I have paid in since April will then be counted for the interest calculation. All the time it has been sitting there (growing by £100 every month) it will essentially have not been earning anything.
Now, if instead I paid that £100 PM into a regular saving account that calculates interest and adds it monthly that money would be earning interest. I could then pull it out in late August (by which point it would be more than £500)  and pay it into the JISA where it would then be counted for the interest calculation there. Obviously there would be a small tax hit on the interest earned in the regular savings account.
Is that feasible? Do regular no-penalty savings accounts pay interest monthly? 

JGB1955

My Marcus account pays interest monthly.  In your scenario, your monthly £100 will be earning interest at an annual rate of 3.25% from the day it is credited to the account.  The interest will only be physically added to the account annually, or when the account is closed.

xylophone

 All the time it has been sitting there (growing by £100 every month) it will essentially have not been earning anything.

What makes you think that?

It is earning interest from the time it is credited to the account. The interest is declared and added to the capital once a year.

https://www.nsandi.com/junior-isa

We calculate the interest daily and add it to your account once a year on 6 April.

colsten

Interest is calculated on the account balance at the end of each day. It might get paid once a year, or once a month, or on closure of the account. Whatever gets paid is the sum of the daily interest earned up to the payment / closure date (minus any penalties for early withdrawals / closure, as specified in the respective account T&Cs). This is how it works for all accounts which pay interest.

It would not be a smart move at present to remove money from a 3.25% account as you won't find any account that pays better interest. Not that anyone can actually withdraw any money from a JISA before the child is 18 - and then it will only be the 'child', who is then an adult, who can make the withdrawal.

[Deleted User]

Hi,

most will tell you,

"We calculate the interest daily and add it to your account once a year on dd/mm/yy."

reg091

Thanks all, that makes sense. I assumed that interest was calculated on the balance on a given day each year (on an account like a JISA where you cannot make withdrawals).
Question about interest being added every day, but only paid once a year: it isn't actually "added" to the account every day then, in the sense that the next days interest calculation would include that interest in the balance. Is that right? It is just "added" behind the scenes as it were, your balance doesn't increase daily so that the interest calculation daily isn't on an increased balance?

colsten

That's right. The only thing that happens on a daily basis is that the interest gets calculated. The account balance does not increase by the results of those calculations until the day the [sum of the daily] interest actually gets paid. 

polymaff

reg091 said:

Question about interest being added every day, but only paid once a year: it isn't actually "added" to the account every day then, in the sense that the next days interest calculation would include that interest in the balance. Is that right? It is just "added" behind the scenes as it were, your balance doesn't increase daily so that the interest calculation daily isn't on an increased balance?

To be precise, when the interest payment date arrives, the bank looks back over the days since the previous payment date and then works out the interest due for that period.  Keeping a background tally of the daily interest earned would be a waste of resources.

Most banks have/had their peculiarities. At one time, how leap years were dealt with differed from bank to bank, some using a slightly lower daily rate  during leap years - although that begs the question of what is a leap year?  Is it the calendar year containing a 29th February or is it the anniversary year of the account's opening containing a 29th February etc. etc. Under pressure to deliver the advertised rate the banks unwillingly accepted that they should use the same daily rate, leap year or not.

Although the last time I enquired of the Skipton BS. their policy was to pay no interest whatsoever on February 29th.

That's Yorkshire for you. ...

https://www.redmolotov.com/image/cache/catalog/designslarge/y/yorkshire-right-wrong-tshirt_2_blacktshirt-1000x1000.jpg

happy_hazelnuts

so in fact the answer to the question asked in the thread title is Yes !

colsten

happy_hazelnuts said:

so in fact the answer to the question asked in the thread title is Yes !

It might be for some accounts, but it is carried out in a very different way the OP originally envisaged. There are also plenty of accounts which pay monthly interest, in which case the interest is calculated about 12 times a year. Similarly, if you close an account during the year, there might be 2 interest calculations in the same calendar year.

p00hsticks

colsten said:

There are also plenty of accounts which pay monthly interest, in which case the interest is calculated about 12 times a year.

And as a general point, such accounts that add interest monthly will quote both an interest rate and an Annual Equivalent Rate (AER), which is the effective rate if the monthly interest is left in the account to compound over a year. The AER allows a direct comparison of interest rates between accounts that pay interest yearly and those that pay monthly.