ISA compound interest

Zazula

I am about to open my first ever ISA.-for a fixed 5 year term. I’ve completed the online form with UBL as theirs was the highest interest. However I noticed in the bumpf it stated the ISA does not compound interest. Is this normal for ISAs -or are there some that do?  

Also the account opening is still pending -no funds added yet- can I open another cash ISA and put funds into this instead if I find a compound paying one?
TIA

eskbanker

Most fixed term ISAs will retain the interest for compounding, so UBL is the exception rather than the rule, but it obviously emphasises the importance of reading terms carefully!

And yes, if you haven't funded the UBL account then you're free to fund another one instead.

AlanF

Further to the question posted above, I'm looking at investing into UBL's 5 year fixed ISA, which is showing top of MSE's chart for a 5 year ISA. However, during the application I have noted the following statement, in line with Zazula's post above.

IMPORTANT NOTICE: UBL UK does not compound interest and interest is not added to your principal amount on any selected interest payment frequency. If you have selected interest payment at maturity, at the end of your term you will have the choice to reinvest your principal and any accrued interest into a new term, or have the interest paid into your nominated account.

This lack of compounding is a little confusing - other institutions (eg Zopa) state that AER (which is what UBL are quoting as their interest rate) makes comparison with other providers easier, and that it includes compounding. Zopa's web site states:

*AER stands for 'annual equivalent rate'. We pay you interest on a monthly basis, but AER shows you the rate you’d get if this monthly interest was compounded and paid once a year instead. We provide an AER to make it easier for you to compare our rates with other providers.

This makes it confusing for me. Does the AER quoted by Zopa (4.01 AER or 3.93% gross fixed) compare fairly with UBL's AER of 4.16%AER and 4.52% gross fixed (if choosing interest paid at maturity)?

Presumably if not compounded, but if I choose to elect payment at maturity, then the total I would have at maturity to reinvest cash-free into a new cash ISA would include the total interest received over the term, not just the original sum invested?

Thanks

Alan

slinger2

You should compare the AERs. UBL are using a strange system to get the 4.52% value. Presumably the total return will be 22.6% which is 4.52%x5. AER does include compounding: 1.0416^5 = 1.226 so 22 6% return over 5 years is 4.16% AER.

Ted_01

Thanks for this thread, I just applied for the 2 year UBL at 4.71% and i was confused by the interest situation. I've decided I'm gonna not fund this UBL account, and instead open a 2 year with OakNorth at 4.71%.

Edit - oh except Oaknorth seem to have suspended isa applications

AlanF

slinger2 said:

You should compare the AERs. UBL are using a strange system to get the 4.52% value. Presumably the total return will be 22.6% which is 4.52%x5. AER does include compounding: 1.0416^5 = 1.226 so 22 6% return over 5 years is 4.16% AER.

This is what confused me - I thought AWR includes compounding, but if UBL don't compound the interest, does that mean their AER rate assumes 0% compounding?
Also, at the end of the term, if I elect to have interest paid to the account, I presume my moving forward ISA pot stands at "cash invested + interest", not just cash invested. So even though the interest isn't compounded, it is added to the sum and remains tax-free if I elect?

slinger2

AlanF said:

slinger2 said:

You should compare the AERs. UBL are using a strange system to get the 4.52% value. Presumably the total return will be 22.6% which is 4.52%x5. AER does include compounding: 1.0416^5 = 1.226 so 22 6% return over 5 years is 4.16% AER.

This is what confused me - I thought AWR includes compounding, but if UBL don't compound the interest, does that mean their AER rate assumes 0% compounding?
Also, at the end of the term, if I elect to have interest paid to the account, I presume my moving forward ISA pot stands at "cash invested + interest", not just cash invested. So even though the interest isn't compounded, it is added to the sum and remains tax-free if I elect?

AER always includes compounding. However UBL also use the term "gross interest" which excludes compounding. So if they are promising a gain of 22.6% over 5 years, they can say 4.15% AER or 4.52% "gross interest", its the same thing. The important thing is that when comparing this product with other products from other companies, the AER is the best guide (as far as the interest goes).

As to the second question I can't really answer it.

homerhotspur

I am also confused by the UBL product. I am looking at their 2 year ISA at 4.71%. So, does this mean they will pay the interest on year 1 directly to my nominated bank  account ? If so, their following table appears incorrect, as surely the total interest paid on £2000 each year and not compounded would be £188.40 whereas they seem to have used compounding in the example?

What would the estimated balance be at the end of the term based on the minimum required deposit?

Below is an example of what the future balance might be after interest has been paid.

GBP FIXED RATE CASH ISA
TERM	MIN. DEPOSIT	INTEREST RATE (AER)	BALANCE AT THE END OF THE TERM
1 Year	£2,000	4.56%	£2,091.20
2 Years	£2,000	4.71%	£2,192.84
3 Years	£2,000	4.39%	£2,275.13
4 Years	£2,000	4.05%	£2,344.22
5 Years	£2,000	4.16%	£2,452.08

slinger2

homerhotspur said:

I am also confused by the UBL product. I am looking at their 2 year ISA at 4.71%. So, does this mean they will pay the interest on year 1 directly to my nominated bank  account ? If so, their following table appears incorrect, as surely the total interest paid on £2000 each year and not compounded would be £188.40 whereas they seem to have used compounding in the example?

What would the estimated balance be at the end of the term based on the minimum required deposit?

Below is an example of what the future balance might be after interest has been paid.

GBP FIXED RATE CASH ISA
TERM	MIN. DEPOSIT	INTEREST RATE (AER)	BALANCE AT THE END OF THE TERM
1 Year	£2,000	4.56%	£2,091.20
2 Years	£2,000	4.71%	£2,192.84
3 Years	£2,000	4.39%	£2,275.13
4 Years	£2,000	4.05%	£2,344.22
5 Years	£2,000	4.16%	£2,452.08

You can choose interest to be paid monthly, annually or on maturity. Interest is paid out of the account I think, so the example given must be the paid on maturity option. In that case the "gross" rate is 4.82% (4.71% AER) so the interest with no compounding is 4.82%*2000*2=192.8.

homerhotspur

Ah yes , I see what they have done, thanks. Unnecessarily confusing I think.

A908705

Well that’s thrown me a curve ball, having been recommended by MSE I feel like I have been conned. It was not obvious or even logical that the interest is not added to the ISA account, that defeats the objective of having the ISA in the first place.

Does the interest received monthly outside the ISA then become taxable? 

It may well be in the detailed blurb but this isn’t what I thought I was signing up for. That plus their very user unfriendly web site makes the one to avoid in future.