Interest Rates 🫤 should I stay or should I go now?

icedms

I have an RCI savings account paying 4.65% interest.
I have just switched to the CoOp bank and to meet their £15 free a month I have to open and save with a regular saver with is offering 7% gross/aer variable (annually).
I really don’t understand interest rates. Should I leave what I have in the RCI and just save the minimum i have to in the coop or should I move everything from the RCI over the months to the coop regular saver?
Advice gratefully received 😊

refluxer

7% is higher than 4.65% so money paid into the Co-op regular saver will earn more interest than it will in your RCI account.

I'm not familiar with the T&Cs of each of those accounts but, as the regular saver appears to be instant access with no withdrawal restrictions, it would seem to make sense to pay the maximum into it every month.

jimjames

icedms said:

I really don’t understand interest rates.

Yon don't need to understand interest rates, just numbers.

If you're earning interest you want to have the biggest number available (so 7 is bigger than 4.65)
If you're paying interest (like a loan) then you want the smallest number  

wmb194

icedms said:

I have an RCI savings account paying 4.65% interest.
I have just switched to the CoOp bank and to meet their £15 free a month I have to open and save with a regular saver with is offering 7% gross/aer variable (annually).
I really don’t understand interest rates. Should I leave what I have in the RCI and just save the minimum i have to in the coop or should I move everything from the RCI over the months to the coop regular saver?
Advice gratefully received 😊

Co-op's regular saver only allows deposits of up £250 per month so the answer might be to keep both and drip-feed money into the Co-op account every month.

icedms

Refluxer & jimjames it’s the letters that confuse me so AER next to the 7% and nothing next to the 4.65% was what made me wonder 😳 thanks for your responses 😁
wmb194 I think that’s what I will do, thank you for your response 👍

refluxer

icedms said:

Refluxer & jimjames it’s the letters that confuse me so AER next to the 7% and nothing next to the 4.65% was what made me wonder 😳 thanks for your responses 😁

4.65% is the gross interest rate which is paid monthly into your RCI account. If that interest isn't withdrawn and is kept in the account, then the interest will 'compound' (you'll subsequently earn interest on that interest) and that gives you the equivalent rate of 4.75% AER (Annual Equivalent Rate) after 1 year.

Banks are required to provide the AER to allow customers to easily compare savings accounts so, in your case, the numbers to compare are actually 4.75% AER for the RCI account and 7% AER for the Co-op account. 

The reason the gross and AER figures are the same (both 7%) for the Co-op account is that the interest is paid annually and so it doesn't compound monthly, like it does in the RCI account.

Exodi

icedms said:

Refluxer & jimjames it’s the letters that confuse me so AER next to the 7% and nothing next to the 4.65% was what made me wonder 😳 thanks for your responses 😁
wmb194 I think that’s what I will do, thank you for your response 👍

4.65% is gross, 4.75% is AER. This is to do with something called compounding, which is to what happens when interest is paid into account and you earn interest on interest (and then interest on interest on interest, etc). This can be quite confusing to work out, so accounts also provide AER (annual equivalency rate) which indicates to people how much they might expect to earn over a year if you included compounding of interest.

To give an example, let's say you have £100 in your RCI savings account which pays interest monthly.

The interest you earn every month is calculated by taking the balance and multiplying it by the gross rate (4.65%/12).

Table included below.

So in the first month, you earn 38.75p interest on £100, giving you a new balance of £100.39.

In the second month you earn 38.9p interest on £100.39, giving you a new balance of £100.78

Before finally in the final month you earn 40.43p interest on £104.35, giving you a new balance of £104.75.

Now the first question would be - if the interest rate is 4.65%, why did I earn £4.75 on £100 (which would suggest the interest rate is 4.75%)?

This is because you weren't earning 4.65%/12 on £100 every month, you were earning it on the new balance including interest - hence you get two rates - the gross rate and the AER which give the same result. For most people, the AER is the only rate that is of interest as it allows quick assessment of the power of compounding.

Similarly an account that only pays interest once at the end of the year year would have an identical gross rate and AER (because you would not have earned any interest on interest, so no compounding would have occured).

Month		Interest		Balance
0				£100.00
1		£0.3875		£100.39
2		£0.3890		£100.78
3		£0.3905		£101.17
4		£0.3920		£101.56
5		£0.3935		£101.95
6		£0.3951		£102.35
7		£0.3966		£102.74
8		£0.3981		£103.14
9		£0.3997		£103.54
10		£0.4012		£103.94
11		£0.4028		£104.35
12		£0.4043		£104.75

Sorry, probably more than you were interested in hearing!

allegro120

icedms said:

I have an RCI savings account paying 4.65% interest.
I have just switched to the CoOp bank and to meet their £15 free a month I have to open and save with a regular saver with is offering 7% gross/aer variable (annually).
I really don’t understand interest rates. Should I leave what I have in the RCI and just save the minimum i have to in the coop or should I move everything from the RCI over the months to the coop regular saver?
Advice gratefully received 😊

Move £250 from RCI to Co-Op regular saver on every 1st of the month.  I think you'll have to do it via Co-Op current account or other current account on your name because RCI process withdrawals only to your linked bank account and in my understanding it has to be a current account.

nottsphil

There have been some elaborate replies about compounding, but isn't the OP asking about the Co-op Regular Saver, which I think is a one-year account only playing interest at maturity? In this case, the relevant information is that the interest rate is 7% per annum. This is particularly important when assessing the returns for regular savers because only the opening subscription ends up getting the full 7%. If the second subscription is paid 40 days later, then it will only earn 325/365 of 7% and so on. So, the £3000 capital you'll hopefully end up with won't give anywhere remotely near £210 interest.

CompulsiveSaver

The way I see this is, if you can get a better rate and you are happy you understand the account you are going to and everything you need to get the better rate, why wouldn't you switch to a higher rate on your savings?

VXman

CompulsiveSaver said:

The way I see this is, if you can get a better rate and you are happy you understand the account you are going to and everything you need to get the better rate, why wouldn't you switch to a higher rate on your savings?

Because, as a regular saver with limits on what you can deposit each month it actually won't accure as much interest as the other savings account.