Interest - paid monthly or annually?

JonSalji

A very basic question - are there any pros and cons when choosing between interest paid monthly or annually on a saving account?

If paid monthly, does this mean it is compounded? (Surely not then of course everyone will choose this option?)

refluxer

If monthly interest is paid into the account, then it will compound and you'll achieve the quoted AER - if you get it paid away to an external account then you'll only achieve the (lower) gross rate.

If the AER is the same for annual vs monthly, then I tend to choose monthly (paid into the same account) so that interest is spread evenly over different tax years. It's also nice to watch your savings grow !

Some people choose monthly interest and have it paid away because they want it as a source of regular income.

eskbanker

refluxer said:

If the AER is the same for annual vs monthly...

Surely it always will be, that's the whole point of using AER?

JonSalji

refluxer said:

If monthly interest is paid into the account, then it will compound and you'll achieve the quoted AER - if you get it paid away to an external account then you'll only achieve the gross rate.

If the AER is the same for annual vs monthly, then I tend to choose monthly (paid into the same account) so that interest is spread evenly over different tax years. It's also nice to watch your savings grow !

Some people choose monthly interest and have it paid away because they need it for income.

Thanks for this! In essence, there is no difference between monthly (paid into account) and annual?

I selected annual for my savings… but wondered if I missed something eg if paid monthly into account:

month 1: interest on deposit
month 2: interest on (deposit + interest the month before)

Where else the interest wouldn’t compound if paid annually eg %interest on initial deposit only.  

sorry, a bit thick! 😅😅

refluxer

eskbanker said:

refluxer said:

If the AER is the same for annual vs monthly...

Surely it always will be, that's the whole point of using AER?

I may be wrong, but I'm pretty sure that, many years ago, you used to tend to get a higher AER (and therefore a bigger incentive) by taking interest annually rather than monthly, whereas these days the monthly and annual AER rates are usually identical.

It's entirely possible I may have remembered incorrectly, though

alibean121

As rates are rising there may be benefits to getting interest monthly to manage your personal savings allowance. Like many of us, I’d struggle to use it up this year but hopefully next year I’ll have a lot more interest for the full tax year! Best for me to have as much paid monthly into this tax year rather than get a lump next year that might end up taxed.

refluxer

JonSalji said:

Thanks for this! In essence, there is no difference between monthly (paid into account) and annual?

I selected annual for my savings… but wondered if I missed something eg if paid monthly into account:

month 1: interest on deposit
month 2: interest on (deposit + interest the month before)

Where else the interest wouldn’t compound if paid annually eg %interest on initial deposit only.  

sorry, a bit thick! 😅😅

When the AER is the same, then the interest you receive will be very similar whichever option you choose so I wouldn't worry about it. That's the whole point of banks quoting the AER figure - it makes it easy to compare different savings accounts

JonSalji

alibean121 said:

As rates are rising there may be benefits to getting interest monthly to manage your personal savings allowance. Like many of us, I’d struggle to use it up this year but hopefully next year I’ll have a lot more interest for the full tax year! Best for me to have as much paid monthly into this tax year rather than get a lump next year that might end up taxed.

Good point, I am not going to breach the cap by a long way (also this is an ISA) but always good to keep in mind!

JonSalji

refluxer said:

JonSalji said:

Thanks for this! In essence, there is no difference between monthly (paid into account) and annual?

I selected annual for my savings… but wondered if I missed something eg if paid monthly into account:

month 1: interest on deposit
month 2: interest on (deposit + interest the month before)

Where else the interest wouldn’t compound if paid annually eg %interest on initial deposit only.  

sorry, a bit thick! 😅😅

When the AER is the same, then the interest you receive will be very similar whichever option you choose so I wouldn't worry about it. That's the whole point of banks quoting the AER figure - it makes it easy to compare different savings accounts

Thank you - this reassures me!

cricidmuslibale

eskbanker said:

refluxer said:

If the AER is the same for annual vs monthly...

Surely it always will be, that's the whole point of using AER?

Not always entirely true! It is only a very small difference but I’m pretty sure that, from December 1, Coventry Building Society’s Easy Access Saver (online) is going to be paying 2.35% gross 2.35% AER annual interest and 2.32% gross 2.34% AER monthly interest.

Also, although they are clearly two different, independent products in this instance, NS&I always pay a slightly lower rate of interest in AER terms on the monthly interest, paid out of the account, Guaranteed Income Bond in comparison to the yearly interest, paid into the account, Guaranteed Growth Bond. Thus if a 3 year Guaranteed Growth Bond is paying 2.35% gross AER for example, the concurrent 3 year Guaranteed Income Bond will probably be paying 2.30% gross monthly, 2.32% AER.

There are probably a few other savings providers who do similar to the above but on the same account rather than two distinct accounts, and thus they reward a little less those opting for monthly rather than annual interest.

ZeroSum

The main difference is that the interest us taxable when its received. So monthly it falls in the correct financial year, whereby annually you could end up paying tax on income that relates to previous year