Fixed Bond Paying at Maturity but NOT Compounded?

karl10247

refluxer said:

I can't speak for some of the banks you mentioned above, but I think that banks that calculate interest in the way you mention are in the minority. 

I've taken out fixed rate accounts with banks like Atom, Ford Money, Shawbrook and others in recent years, had interest paid into the account either annually or monthly and interest has compounded in all of them, which is normal as far as I'm aware.

The only reason why interest wouldn't compound in fixed rate accounts offered by banks like those is if you had it paid away to a different account.

Ok thats good to know. Thats good to hear about Atom, Ford Money and Shawbrook allowing interest to be fed back in for compounding. I read the T&Cs for Atom but it really wasnt clear like many bank T&Cs ive read lately. To be honest this is a complete minefield of grey areas for me.

To close this thread out and give guidance to anyone else confused. Is there an easy way to realise if an account pays away interest or reinvests (compounds)? Ive looked at many accounts recently and there is a LOT of ambiguity around this area

karl10247

soulsaver said:

Well, the Isbank 5 year one isn't compounded because it pays out the interest to your (Raisin?) ac at the end of each year.

This is exactly what I'm talking about with ambiguity. The Isbank account is clearly labelled "Availability - At Maturity" yet when you dive into the T&Cs pdf they confirm as you say that your interest is actually paid out annually to your Raisin account. For people who pay tax on their interest, clarity of when interest is "accessible" is vital.

As martin says on Savings accounts: 2.92% easy access or up to 4.5% fixed (moneysavingexpert.com)

"Important! On multi-year accounts, you're taxed on savings interest in the tax year you can access that interest"

I actually applied for the Isbank account at the weekend on the basis that interest will all be accessible at maturity only - this fit my tax profile. Thanks to you ive discovered this is not the case so ill be cancelling my application before the cooloff period expires.

My head hurts

Bigwheels1111

karl10247 said:

soulsaver said:

Well, the Isbank 5 year one isn't compounded because it pays out the interest to your (Raisin?) ac at the end of each year.

This is exactly what I'm talking about with ambiguity. The Isbank account is clearly labelled "Availability - At Maturity" yet when you dive into the T&Cs pdf they confirm as you say that your interest is actually paid out annually to your Raisin account. For people who pay tax on their interest, clarity of when interest is "accessible" is vital.

As martin says on Savings accounts: 2.92% easy access or up to 4.5% fixed (moneysavingexpert.com)

"Important! On multi-year accounts, you're taxed on savings interest in the tax year you can access that interest"

I actually applied for the Isbank account at the weekend on the basis that interest will all be accessible at maturity only - this fit my tax profile. Thanks to you ive discovered this is not the case so ill be cancelling my application before the cooloff period expires.

My head hurts

I’ve applied for said account as I want interest paid out yearly. For tax reasons and an income.
I hope they keep the rate for a week or two as don’t have funds yet.
They have a 60 day funding window. If rate is to change you gat a week to fund and keep rate.
Quite a fair policy.

refluxer

karl10247 said:

refluxer said:

I can't speak for some of the banks you mentioned above, but I think that banks that calculate interest in the way you mention are in the minority. 

I've taken out fixed rate accounts with banks like Atom, Ford Money, Shawbrook and others in recent years, had interest paid into the account either annually or monthly and interest has compounded in all of them, which is normal as far as I'm aware.

The only reason why interest wouldn't compound in fixed rate accounts offered by banks like those is if you had it paid away to a different account.

Ok thats good to know. Thats good to hear about Atom, Ford Money and Shawbrook allowing interest to be fed back in for compounding. I read the T&Cs for Atom but it really wasnt clear like many bank T&Cs ive read lately. To be honest this is a complete minefield of grey areas for me.

To close this thread out and give guidance to anyone else confused. Is there an easy way to realise if an account pays away interest or reinvests (compounds)? Ive looked at many accounts recently and there is a LOT of ambiguity around this area

The fixed account summary box or T&Cs should tell you what your options are - it's usually either a choice between annual or monthly interest or there'll be no choice (eg. annually / upon maturity only) and they should also state if there is a choice between having the interest paid into the same account or paid away. If it's paid into the account monthly (or annually for terms longer than 12 months), then it should compound.

Note that there are some accounts where interest must be paid away when choosing the monthly option, in which case you'll need to select annual interest (for fixed terms greater than 1 year) in order for the interest to compound.

In the case of the Close Brothers bond you previously mentioned, interest can't be paid into the same account no matter whether you choose monthly or annual interest and this is the reason it doesn't compound. I don't think this approach is that common though, which is presumably why they make a point of stating it on the product page.

FWIW, I've had fixed rate accounts with the banks I previously mentioned (plus others like Nationwide, Paragon and OakNorth) for varying lengths of time and there has been the option to have the interest paid into the same account in every one of them, meaning that compounding can occur.

This is just my experience with the companies I've dealt with though. As always, you should read the T&Cs of the accounts you're interested in to be sure.

karl10247

Thankyou @refluxer, your advice is excellent

Putting this into practice ive just reviewed another account with Gatehouse Bank: 5-Year-Fixed-Term-Woodland-Saver-Key-Product-Information.pdf (gatehousebank.com). The T&Cs seem to be more user friendly and clearly explain that interest which is calculated annually can be
• Added to your account
• Paying it into your nominated account
• Paying into another account held in your name

So the first option to reinvest would be the compounding that im after, nice and clear.

However, i have one last question (promise last) -

If i opt for the interest to be added to the account would this mean the interest is not "accessible i.e. all tax (if any) would be paid in 5 years time vis-a-vis how Martin describes tax at maturity in the MSE link above?

Thats what im after....

wmb194

karl10247 said:

However, i have one last question (promise last) -

If i opt for the interest to be added to the account would this mean the interest is not "accessible i.e. all tax (if any) would be paid in 5 years time vis-a-vis how Martin describes tax at maturity in the MSE link above?

Thats what im after....

If the bond gave the *option* to have the interest paid away during the term then it was accessible and so it should be reported in the tax year it arises. 

If there was no option e.g., as with Nationwide's current online bonds then all the interest is deemed to arise in the tax year of maturity. However, Nationwide has told posters in other threads that it plans to report interest from these bonds annually and so HMRC will likely treat it as arising every year i.e. it might depend on how the financial institution reports it.

karl10247

wmb194 said:

karl10247 said:

However, i have one last question (promise last) -

If i opt for the interest to be added to the account would this mean the interest is not "accessible i.e. all tax (if any) would be paid in 5 years time vis-a-vis how Martin describes tax at maturity in the MSE link above?

Thats what im after....

If the bond gave the *option* to have the interest paid away during the term then it was accessible and so it should be reported in the tax year it arises. 

If there was no option e.g., as with Nationwide's current online bonds then all the interest is deemed to arise in the tax year of maturity. However, Nationwide has told posters in other threads that it plans to report interest from these bonds annually and so HMRC will likely treat it as arising every year i.e. it might depend on how the financial institution reports it.

Thankyou @wmb194 this is very clear and extremely helpful. I'm sure this will help a lot of people, including me

refluxer

karl10247 said:

Thankyou @refluxer, your advice is excellent

Putting this into practice ive just reviewed another account with Gatehouse Bank: 5-Year-Fixed-Term-Woodland-Saver-Key-Product-Information.pdf (gatehousebank.com). The T&Cs seem to be more user friendly and clearly explain that interest which is calculated annually can be
• Added to your account
• Paying it into your nominated account
• Paying into another account held in your name

So the first option to reinvest would be the compounding that im after, nice and clear.

Yes, that appears to be the case with that one. If you have the interest paid into the account then, by my reckoning, the overall return after 5 years @ 4.45% AER works out at around 4.86%.

karl10247 said:

However, i have one last question (promise last) -

If i opt for the interest to be added to the account would this mean the interest is not "accessible i.e. all tax (if any) would be paid in 5 years time vis-a-vis how Martin describes tax at maturity in the MSE link above?

Thats what im after....

This point has been much-debated on this forum and, as mentioned above, the consensus seems to be that it is when the bank reports it to HMRC that is the important factor. I haven't held many bonds for durations of more than a year but for the ones I have held, interest has been paid into the account monthly and tax summaries have been provided just after the end of every tax year which implies to me that this is also when the bank would report it to HMRC. 

In general, annual reporting is normally preferable as it spreads any potential tax liability over multiple tax years and reduces the chances of a big tax bill at the end, especially after a long duration like 5 years. This can depend on an individual's tax situation and the amounts involved though, of course.

claudebutler

Please can Moneysaving Expert indicate whether recommended accounts are compound interest or not? I have a Close Brothers fixed bond which I've just discovered does not pay compound interest. So although its headline rate over 5 years is 4.45%, that's equivalent to 4.09% with compound interest. You have to burrow into the terms to find this out, and to clock that when it says 'Interest is paid annually into your nominated bank account' that isn't an option, that is what it does, so by the end of the term, you have the same capital sum as when you started. This is very disappointing, and neither MSE or the Daily Telegraph piece that also recommended the bond pointed this out. 

wmb194

claudebutler said:

Please can Moneysaving Expert indicate whether recommended accounts are compound interest or not? I have a Close Brothers fixed bond which I've just discovered does not pay compound interest. So although its headline rate over 5 years is 4.45%, that's equivalent to 4.09% with compound interest. You have to burrow into the terms to find this out, and to clock that when it says 'Interest is paid annually into your nominated bank account' that isn't an option, that is what it does, so by the end of the term, you have the same capital sum as when you started. This is very disappointing, and neither MSE or the Daily Telegraph piece that also recommended the bond pointed this out. 

But you've earnt the interest along the way and you can compound it in other accounts if you like so how is it 4.09%? If it's 4.45% gross then that's what it is before compounding it elsewhere.