Interest paid monthly vs annually

se2020

I'm looking at opening a savings account and noticed some of them offer monthly interest payments. 

I will be having the interest paid into the same savings account so does it make any difference if I have monthly or annual payments?

I would have thought monthly payments would be better as the interest would compound but it looks like monthly rates are lower so it all works out the same at the end of the year?

2010

se2020 said:

I'm looking at opening a savings account and noticed some of them offer monthly interest payments. 

I will be having the interest paid into the same savings account so does it make any difference if I have monthly or annual payments?

I would have thought monthly payments would be better as the interest would compound but it looks like monthly rates are lower so it all works out the same at the end of the year?

Correct, it`s just the same.
Some people choose yearly because of tax but basically it works out the same.

nilrem_2

se2020 said:

I will be having the interest paid into the same savings account so does it make any difference if I have monthly or annual payments?

I generally choose monthly if it's available, there are two ways at looking at this and it depends on your circumstances really.

In my case I choose monthly for two reasons.

The first reason is that being retired and living on pensions I have my monthly interest paid into my current accounts and therefore can choose to either spend it of reinvest the amount into another savings account. I also like to see the money going into my account regularly so to speak.

The second reason is that when interest rates are on the rise this is useful because if you are on a fixed rate for say 2 years and the rates available increase you are able to reinvest the interest at the higher rate. whereas with annual interest you have to wait for your money.

 However if rates are going down then monthly interest can be a disadvantage because you may get less interest than it it was added to the account rather than being paid out, If that makes sense.

zagfles

Yes monthly rates are usually the same AER as the annual rate which normally means a lower gross rate to account for compounding. But it can make a slight difference depending on the timings of deposits/withdrawals/interest payments but it'll be trivial. For instance a regular saver type account where the balance increases towards the interest payment date is better with annual interest.

Speculator

On some Fixed rate bonds (RCI, Melton, Aldermore etc etc) you can change from annual interest to monthly and vice versa mid way into the fixed rate period. You can even request the interest be paid to an external account.

Did that with my Melton BS and now my RCI bond which has 2 yrs to run.

Not all bank/BS allows this such as the TSB although you could try writing them a letter or calling them.

BooJewels

I think it will be a very personal decision as to which suits your circumstances and requirements.   On an EA account, it should end up pretty much the same if you leave it alone.

I have several fixes and chose them because they pay monthly interest to an external account - in this case an easy access saver with the same BS.  I did some calculations and the nett difference of the money staying where it was and compounding, or going to an EA at a slightly lower rate of interest and compounding there was worth it for me.  It meant I didn't have to wait to get at the money if I needed it, lessening the blow of fixing funds totally away.  Plus, I never had money until recently, so seeing the interest arrive regularly makes me happy.  Maybe over time I'll get more blase about it and prefer it to earn more, but for now I like seeing it and being able to get at it.

For me, any interest I make and any PB wins are my 'quality of life' fund - for holidays, days out, home improvements etc., so I like that I can get at them if I want to do something.  It's not the most lucrative option, but it's a compromise that suits me and my requirements.

DullGreyGuy

from a purely noddy point of view... if its paid monthly then rounding has to apply monthly as you cannot depost £15.567 interest and so it'll be £15.57.

In the round this should even out as the £15.5649999 interest would equal rounded down. In a personal perspective it may be less certain... Ive done annuity calculations where there has been confusion how rounding should be applied and whilst for the first increase the difference is at most 1p this compounds up significantly over time.

IntoTheForest

I always pick monthly if it's available as I find it motivational to see the interest getting paid.

where_are_we

If you opt for annual interest it is easier to keep tract of your total annual tax year savings interest calculation for all your savings accounts. I realise that you can get a total annual tax year interest statement from each savings institution after the end of the tax year. Tallying up with HMRC interest figures will be easier, as will be working out in the present tax year if you are going to exceed the PSA of £1000 for basic rate tax payers.

nilrem_2

where_are_we said:

If you opt for annual interest it is easier to keep tract of your total annual tax year savings interest calculation for all your savings accounts. I realise that you can get a total annual tax year interest statement from each savings institution after the end of the tax year. Tallying up with HMRC interest figures will be easier, as will be working out in the present tax year if you are going to exceed the PSA of £1000 for basic rate tax payers.

Being retired I don't now have to deal with Tax, but when I was filling in self assessment tax forms before I never had any problems dealing with monthly interest even though I had lots of different accounts.  

badger09

nilrem_2 said:

where_are_we said:

If you opt for annual interest it is easier to keep tract of your total annual tax year savings interest calculation for all your savings accounts. I realise that you can get a total annual tax year interest statement from each savings institution after the end of the tax year. Tallying up with HMRC interest figures will be easier, as will be working out in the present tax year if you are going to exceed the PSA of £1000 for basic rate tax payers.

Being retired I don't now have to deal with Tax, but when I was filling in self assessment tax forms before I never had any problems dealing with monthly interest even though I had lots of different accounts.  

Being retired, in itself, doesn’t exempt you from having to deal with tax. As many of us are (sometimes painfully) aware.