Cahoot Sunny Day Saver interest

FarmGirl78

I'm usually very savvy with financial stuff, but I've overthought this so much now I've got the mental capacity of a bowl of lentils. So I'm going back to basics trying to explain what I'm stuck on.

Cahoot Sunny Saver. 5.00% AER/

4.89% gross (variable) if interest is paid monthly. My understanding that the difference between those two figures is that normally if you get paid interest monthly and leave it an account, it compounds, meaning you get interest on the interest. So after 12 months you get a better overall chunk of interest then you would have done if you'd skimmed off the interest each month. Is that right? 

But with the Cahoot Sunny Saver, I don't get interest on balances of over £3k. I planned to stick £3k in there on Day1 and not touch it for the term. I'll get interest on my £3k, but not on any portion over that. So I'm assuming it means interest WON'T compound if I have exactly £3k in there? If I go for the option of monthly interest I can skim it off and put it somewhere else, even earning less interest is better than earning no interest surely? Interest is calculated daily, but if I go for annual interest payment there's no opportunity for that interest to gain more money is there? I'm better off having monthly interest to reinvest aren't I? I know the difference is going to be only a few pounds but it's more the concept I want to get straight in my head.

It's the same situation with my NatWest regular saver which is at its maximum balance, but that didn't have option for annual interest so interested gets skimmed off monthly and deposited elsewhere. No opportunity for overthinking that one!

Can someone explain this to me like I'm about 6? Cheers

slinger2

In some ways it's simpler to go for the annual interest option. You'll get 5.0% interest and you'll only have to skim it off once a year. With the monthly interest option you only get a gross annual rate of 4.89% (to take account of compounding) and you'll have to skim it off every month.

An alternative it to have a bit less than £3k in there, eg £2950. then you won't have to skim off so often, even with the monthly option.

clairec666

Your understanding of gross/AER is spot on.

The problem with Cahoot (and Natwest) which pay less/no interest after a certain amount, is that you have to skim off any amount over that limit if you want to maximise interest from it.
How often you want to skim is up to you. For simplicity, go for annual interest and skim once a year. If you go for monthly interest you could skim every month, or leave it for a couple of months, or longer.
£3000 will earn about £12 a month interest. That £12 is now above the limit so will not earn any interest, but if you calculate how much interest that will earn in a month (£12 x 0.048 / 12) then see if it's worth the hassle of skimming monthly!

Re your third paragraph - let's break down the calculations
£3000, annual interest of 5% = £150
£3000 with monthly interest - monthly interest = £12.23, total interest = £146.70
This assumes you either a) leave the interest in the account, or b) skim it off to a current account earning 0% interest.
If on the other hand you transfer it each month to another account (which for our purposes coincidentally pays exactly the same rate as Cahoot!) then it will gain interest in that account, bringing your total back up to.... £150. So, nothing lost, nothing gained.

FarmGirl78

Thanks Slinger, but this is where I'm confused. If I have £3k in there, and go for annual interest how can it compound? The interest (admittedly on by fractions of pennies) will take me over £3k from day 1, so I won't get any interest on that tiny portion. I won't get compound interest. Or do they in essence treat the interest as a separate bit and compound it behind the scenes when the calculate the interest each day?

FarmGirl78

@clairec666 Thank You. My addled brain is I think being knotted up by thinking that.....I don't know....I can't even explain it now. I couldn't understand how the interest annually could be more if it couldn't compound. But you've explained it so I can see the figures, so thank you. Off for a lie down in a dark room!

slinger2

FarmGirl78 said:

Thanks Slinger, but this is where I'm confused. If I have £3k in there, and go for annual interest how can it compound? The interest (admittedly on by fractions of pennies) will take me over £3k from day 1, so I won't get any interest on that tiny portion. I won't get compound interest. Or do they in essence treat the interest as a separate bit and compound it behind the scenes when the calculate the interest each day?

There's no compounding with the annual interest option. However you get a higher interest rate (5.0% v 4.89%) to take account of that. So at the end of the year it's all the same. See clairec666's post above

FarmGirl78

slinger2 said:

FarmGirl78 said:

Thanks Slinger, but this is where I'm confused. If I have £3k in there, and go for annual interest how can it compound? The interest (admittedly on by fractions of pennies) will take me over £3k from day 1, so I won't get any interest on that tiny portion. I won't get compound interest. Or do they in essence treat the interest as a separate bit and compound it behind the scenes when the calculate the interest each day?

There's no compounding with the annual interest option. However you get a higher interest rate (5.0% v 4.89%) to take account of that. So at the end of the year it's all the same. See clairec666's post above

Ahhh!! So it's actually a different given rate of interest, that compounds to give the same overall rate? I GET IT!! My god I'm a moron. It's so simple when you put that v in there! The penny just dropped!! I understand!!

Thank you both!! Claire you've given me the figures, and Slinger you've explained the bit I was missing. I'm so used to regular savers my brain wasn't engaging with interest on a lump sum.

jameseonline

You say you have a NatWest Regular, you might want to get the RBS version if not already, will take ages to fill though but might be useful if you have spare funds & happy enough with the way the NatWest one works.

There's various other accounts paying more regular saver wise though.

For example Monmouthshire BS do 6% & 7% regular savers & have high max monthly deposit limits & you can take money out when you need to.

35har1old

jameseonline said:

You say you have a NatWest Regular, you might want to get the RBS version if not already, will take ages to fill though but might be useful if you have spare funds & happy enough with the way the NatWest one works.

There's various other accounts paying more regular saver wise though.

For example Monmouthshire BS do 6% & 7% regular savers & have high max monthly deposit limits & you can take money out when you need to.

Switch to RBS get £125 + £50 for opening the digital saver plus rounds up x 5 £1.01 = £ 4.95