Cash ISA unsure about the interest rates

galastur

Hi, 

I am unsure as to the difference between the two highlighted columns. Could anyone please explain?  Please note that english is not my first language, and my knowlege regarding finances is limited, so if you could please, please use plain language. 

1 AER stands for Annual Equivalent Rate and shows what the interest rate would be if interest was paid and added to the capital balance each year.

3 The tax-free rate is the contractual rate of interest payable where interest is exempt from income tax.

This is the url to the isa account. 


Many thanks!

PS1: I was going to go with the annual interest at 5.06, but surely it will be better the monthly interest at 5.06? I am definitely missing something here, but I do not know enough, arrrrgh


PS2: The two columns with the *3 (tax-free rate) are a bit confusing in the is scenario, as this is an ISA account, so it is already tax-free...right? maybe once i understand the difference it will make sense

eskbanker

galastur said:

I was going to go with the annual interest at 5.06, but surely it will be better the monthly interest at 5.06? I am definitely missing something here, but I do not know enough, arrrrgh

No, all rates shown outline how much interest you'd earn over the year, regardless of how frequently the interest is paid, so a slightly lower rate is used for interest paid monthly, on the assumption that it'll be left to compound, and after compounding it'll be the same 5.06% that you'd receive if paid in one go annually.

The purpose of the AER (Annual Equivalent Rate) measure is to allow comparison between interest payable at different frequencies, and with very few minor exceptions, the AER will be the same for each, i.e. the overall interest earned from either option is identical.

https://www.moneysavingexpert.com/banking/interest-rates/#save

galastur said:

The two columns with the *3 (tax-free rate) are a bit confusing in the is scenario, as this is an ISA account, so it is already tax-free...right? maybe once i understand the difference it will make sense

As you say, ISA interest is tax-free.

Ocelot

Basically, you would receive 4.95% if you had the interest paid away from the ISA (and into your bank account), 5.06 if you left it to add to your ISA (and earn interest itself), irrespective of whether if was paid annually or not.

galastur

Thanks both for your explanations...note: i still think that table is very confusing!