Moneybox ISA annual interest

danlightbulb

Hi,

Moneybox ISA is paid annually. But does it compound daily still?

MSE doesn't say and neither does the Moneybox website.

There's an example calculation on Moneybox which seems to suggest it DOES NOT compound daily. If so, that is worth MSE pointing out as it could be worth quite alot of missed interest.

masonic

No it does not compound daily. Very few accounts do. Most are either monthly or annually. The AER rate is used to make a like for like comparison between accounts that pay and compound interest on a different basis. The AER rate is the rate that would give the same amount of interest if interest were paid and compounded annually. Which is why monthly interest variants with the same AER have a lower gross interest rate.

danlightbulb

So if the AER on Moneybox is given as 5.05%, what does that make the gross rate?


Edit found a calculator for its - its about 4.93% gross.

Don't like the idea of not receiving my interest for a full year.

eskbanker

danlightbulb said:

So if the AER on Moneybox is given as 5.05%, what does that make the gross rate?

Edit found a calculator for its - its about 4.93% gross.

Don't like the idea of not receiving my interest for a full year.

If the interest is paid annually then the gross rate is the same as the AER!  Did you specify/assume monthly interest when reverse engineering a lower gross rate?

Obviously if you want interest to be paid more frequently than annually then you wouldn't open an account paying annually....

Ultrasonic

danlightbulb said:

Don't like the idea of not receiving my interest for a full year.

Do you need to access the interest as income? If not then for ISAs it makes zero difference in practice.

danlightbulb

So the reason I asked about compounding is that obviously compounding adds a bit to the interest received.

I was surprised to learn that these ISAs aren't compounded daily, or at least monthly. This is losing a small amount of interest.

So the headline rate (5.05% in the case of Moneybox) is actually slightly worse in practice because I would expect compounded interest.

eskbanker

danlightbulb said:

So the reason I asked about compounding is that obviously compounding adds a bit to the interest received.

I was surprised to learn that these ISAs aren't compounded daily, or at least monthly. This is losing a small amount of interest.

So the headline rate (5.05% in the case of Moneybox) is actually slightly worse in practice because I would expect compounded interest.

No, I think you've misunderstood the significance of compounding!

Savings accounts always quote an AER in order to reflect the effect of any compounding, so if you have a 5.05% AER account paid annually then you receive 5.05% after a year, or if it's paid monthly then the gross rate used is adjusted (to something like the 4.93% you mentioned) so that once compounded it delivers the same 5.05% over the year.  In other words, paying interest less frequently doesn't reduce the overall amount of interest paid, as the rates are adjusted accordingly, and AER is the figure you need to pay attention to....

slinger2

It's basically exactly the same. You can either have 5.05% for yearly interest or 4.93% for monthly interest. If you go for the monthly option you'll benefit from compounding but it's all worked out that if your leave all that monthly interest in the account, you end the year getting, surprise surprise, 5.05%.

Of course, if you take all that monthly interest out of the account then at the end of the year you'll only have got 4.93%.

danlightbulb

No I understand that they are advertised as AER. But like alot of people I don't see that immediately. So if an account says 5.05% I would expect (initially) 5.05% on month 1, then compounded 5.05% for month 2 etc, so I initially see it as gross.

Obviously that's my fault in the way I would naturally interpret.

I'd prefer if they advertised the gross rate and compounded daily tbh.

Anyway thanks for the clarifications.


With Moneybox, as they don't credit the interest until after a year, then if I was to withdraw all my cash and close the account do they then immediately credit the interest at that point?

t0rt0ise

I'd disagree with others here as in my experience most compound daily even if they add the money monthly or annually. Try a google search.

Ultrasonic

danlightbulb said:

No I understand that they are advertised as AER. But like alot of people I don't see that immediately. So if an account says 5.05% I would expect (initially) 5.05% on month 1, then compounded 5.05% for month 2 etc, so I initially see it as gross.

Obviously that's my fault in the way I would naturally interpret.

I'd prefer if they advertised the gross rate and compounded daily tbh.

Anyway thanks for the clarifications.


With Moneybox, as they don't credit the interest until after a year, then if I was to withdraw all my cash and close the account do they then immediately credit the interest at that point?

The AER works perfectly well and gives a straightforward way for savers to know how much they'd have earned in interest after a year for an initial lump sum investment. I see no upside for your preference?