Moneybox ISA annual interest

slinger2

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?

AER = Annual Equivalent Rate. It's meant to provide a way of comparing accounts when the interest is paid at different intervals. So if you have two accounts, one paying annual intertest at 5.05% and the other paying monthly interest at an annual rate of 4.93%, then the fact that both have an AER of 5.05% tells you that they're basically exactly the same.

If you're planning to close the account early you'll generally get the interest at closure. In this situation you'll do marginally better with the annual option.

masonic

t0rt0ise said:

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.

No, it is calculated daily and compounded when it is paid. Except for a few aberrations, you don't earn interest on more than your account balance on any day. It is very easy to check by comparing the AER with the gross rate. For daily compounding the gross rate will be lower than for monthly compounding and for annual compounding AER = gross as already pointed out. See https://en.wikipedia.org/wiki/Annual_equivalent_rate#Calculation for the formula to convert between the two.

All normal bank accounts take the closing balance at the cut-off time each day and multiply it by the (gross rate / 365) for non leap years to calculate interest for that day. The T&Cs will have a statement reflecting this. Different banks have different approaches for leap years. The also have different approaches to deposits made on non-banking days. Interest that has not yet been credited does not form part of the account balance.

masonic

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?

Hopefully the following will trigger a lightbulb...

The AER is higher than the gross rate for accounts that compound more frequently than annually. For monthly interest at 5% AER, the gross rate will be about 2.3% lower (this is the extra you'll get through compounding), for daily compounding or continuous compounding this increases to almost 2.5%. So for an account offering the choice of 5% AER compounded annually, monthly, or daily, the relevant rates would be 5.00%, 4.89%, and 4.88% respectively. If you put £10k into any of these options, you'd have the same interest paid by the end of the year, though the annual option will accumulate it faster in the beginning and more slowly towards the end of the year.

When interest has accrued but hasn't been paid yet, in almost all cases it is paid immediately upon closure. This actually results in you achieving a higher rate than quoted, since the interest can be compounded earlier than annually, which gives you a benefit over monthly interest paid at the same AER (but lower gross rate).

friolento

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?

It doesn't say that the monthly rate would be 5.05%. It says the AER is 5.05%.

If you close a savings account (ISA or non ISA) before 12 months, you will get the interest that has accrued until then, minus any early redemption penalties if the account T&Cs stipulate such penalties. Easy Access accounts generally do not have such penalties.

danlightbulb

Ultrasonic said:

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?

I think because if I had some cash in a savings account with interest paid monthly, it's the gross interest rate I would need to know to work out how much interest I'd get that month.

Eg if I had £10k at 5%, in month 1 I would get:

10k * 0.05/12 = £41.66


If they only tell you the AER but pay monthly, it's a bit more tricky to work out.

eskbanker

danlightbulb said:

If they only tell you the AER but pay monthly, it's a bit more tricky to work out.

Accounts paying interest monthly should quote the applicable gross rate as well as the AER, is there an account you're thinking of that doesn't do this?

masonic

danlightbulb said:

Ultrasonic said:

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?

I think because if I had some cash in a savings account with interest paid monthly, it's the gross interest rate I would need to know to work out how much interest I'd get that month.

Eg if I had £10k at 5%, in month 1 I would get:

10k * 0.05/12 = £41.66


If they only tell you the AER but pay monthly, it's a bit more tricky to work out.

You can directly use AER for annual interest, because AER = gross rate. For monthly interest, you should be told the gross rate as eskbanker says. If you need to work it out you can do so by taking the AER and converting it, but there may be rounding errors involved:

• First convert AER to a decimal and add 1, e.g. 5% => 0.05 => 1.05
• Next raise to the power of 1/12 (12 is the number of compounding periods), e.g. 1.05^(1/12) = 1.0040741
• Finally subtract 1 and multiply by 12, e.g. 1.0040741 => 0.0040741 x 12 = 0.048889 = 4.89%

To work out the interest in a particular month, you cannot simply divide the gross rate by 12 as there are an unequal number of days in each month. Therefore you need to divide by 365 days in a normal year and then multiply by the actual number of days in the period you are looking at. So, for example in May with 31 days, providing you held £10k in the account for the whole month, you'd earn:

• £10k x 0.048889 / 365 x 31 = £41.52 for monthly interest
• £10k x 0.05 / 365 x 31 = £42.47 for annual interest

That's 95p extra in the annual example, which compensates you for the lack of compounding over the year, so that at the end of the year the total interest earned would be equal for both options. Due to compounding, monthly will gradually catch up with annual over the 12 months until interest is paid on the annual account.

For the oddball example where interest compounds daily, you'd have [1.05^(1/365) - 1] * 365 = 0.048793 = 4.88% and £10k x 0.048793 / 365 * 31 = £41.44 (8p less than the monthly compounded example, and £1.03 less than the annual example).

Now, if the rate was slashed at the end of May and you closed the account and moved your money to another account, you'd be able to bank that extra interest from the annual option and be quids in. Where you have a choice and the AER of both options is the same, annual can be better if you don't need to access monthly interest.

clairec666

Thanks for the nice in-depth explanation, masonic

For the mathematicians amongst you, watch this great youtube video from 3Blue1Brown: https://www.youtube.com/watch?v=IAEASE5GjdI It gets into some very deep stuff about imaginary numbers, but starts off with a good explanation of compound interest and how frequently it compounds. Jump to about 3 minutes in.

Ultrasonic

danlightbulb said:

Ultrasonic said:

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?

I think because if I had some cash in a savings account with interest paid monthly, it's the gross interest rate I would need to know to work out how much interest I'd get that month.

Eg if I had £10k at 5%, in month 1 I would get:

10k * 0.05/12 = £41.66


If they only tell you the AER but pay monthly, it's a bit more tricky to work out.

As has been explained you can work this out regardless but is there a particular reason you would need to?

What is your personal situation and what are you trying to decide? Asking as I suspect you may be making comparing the currently available options seem more complicated than it actually is...

slinger2

So, unless you're living off the interest, the differences between the two can generally be ignored. It's really a personal preference. I normally go for the annual option since I find that simpler - just 1 number per year and also slightly delays the tax I'll have to pay on it. Others like to see the interest accumulating through the year.