Cash ISA - Is having interest paid monthly more lucrative than annually?

Tunstallstoven

Hi

I'm applying for an ISA and it is asking whether I want the interest paid monthly or annually.  Please could someone explain which would be better, as I'm a bit unsure about it.  

The way I see it... 

- If monthly, I can then put that interest in another savings account each month and get interest on the interest. 
- If annually, the interest accrued over the year will not have interest on it, so no compound interest as it isn't paid until the year end. 

But I've got a feeling I might be missing something! 

If anyone could please confirm or explain I'd be most grateful. 

Many thanks    

refluxer

The AER for interest paid monthly or annually is usually the same so if monthly interest is paid into the account, then it'll compound and there won't be much difference between the two options.

Personally, as I don't need my ISA interest as regular income, I have it paid into the ISA so that the amount shielded from tax can grow year after year. I'm likely to benefit more from doing this in the long run than I would do if I had monthly interest paid out of the account (even if that account paid a slightly higher rate) due to the tax implications of doing this.

InvesterJones

Yes, depends on the interest rates. If the gross interest rate is the same between annual and monthly then monthly will be better due to compounding, however normally monthly rates are lower, so that the AER (which takes account of compounding) ends up the same and it'd make no difference.

masonic

Monthly generally makes most sense if you need to spend the interest, or if you can reinvest it in a different product at a higher rate.

Tunstallstoven

OK, that's great - thanks for the help.  

surreysaver

And if you take the interest out if the account, it'll no longer be protected from the tax man (unless its going into another ISA)
The only reason you would want it monthly is if you're using it for an income or to reinvest.
Other non-ISA accounts you may want it monthly to alter which tax year the interest is paid, but that wouldn't matter with an ISA