Interest added monthly or annually.

fly-catchers

Am I right in thinking that you get more interest if added monthly as the interest also earns interest. Rather than the interest added at the end of the year? Or am misreading that?

InvesterJones

https://forums.moneysavingexpert.com/discussion/6662983/interest-added-monthly-or-annually

If they pay the same gross, then yes. However most accounts pay less gross when monthly so that the AER is the same.

luci

https://forums.moneysavingexpert.com/discussion/6662983/interest-added-monthly-or-annually

I believe that over 12 months, the interest works out to be the same. Monthly interest is normally at a slightly lower rate than annual interest.

surreysaver

In theory it shouldn't make a difference, although annual would be better if you're going to close an account early.

Monthly may be better depending upon your tax situation, if the account is spread over two tax years and one year you may not be paying tax on your savings interest. Although this tax year, monthly may be better as next tax year the amount of tax on savings interest increases

where_are_we

"Although this tax year, monthly may be better as next tax year the amount of tax on savings interest increases" This tax year, for new 12 month Regular Savers, if their is an option for monthly or annual payment of interest, I shall be choosing monthly rather than annual thus avoiding having all the interest for a 12 month RS paid out in the 27-28 tax year when the 22% tax kicks in.

BridgetTheCat

They usually pay a slightly lower rate if you take interest monthly, so that it works out the same. I like to get monthly interest because it gives me a little psychological buzz to see it hitting my account every month.

katejo

https://forums.moneysavingexpert.com/discussion/comment/81952577#Comment_81952577

Yes I really like that psychological buzz 🙂. Sometimes get impatient waiting for the annual interest.

masonic

If the AER is the same, then you'll get slightly more interest from annual if you close the account before the end of the account year.

I always opt for annual interest if it is available, because it makes calculating total interest easier. Though there is a case for monthly when it results in less tax being owed - which will be especially relevant for accounts opened over the next 12 months.

Dobbibill

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

This article explains more and says this…..

Where interest is paid monthly

If interest is paid annually then the gross rate and AER should be the same, as there's no interest compounding.

Yet when interest is paid monthly, then the gross rate given is usually around 0.1% less than the AER rate. This is because if the monthly interest was left in the account, then there would be interest on the interest too. The AER makes sure this is included.

For an identical account, if interest was paid monthly it would be a 4.89% gross rate, but if interest was paid annually it would be 5% gross. Leave the money there over a year, though, and both would receive the same amount, as the AER for both is 5%.

EthicsGradient

https://forums.moneysavingexpert.com/discussion/comment/81952764#Comment_81952764

How does that work? Is that really comparing like with like, ie closing the monthly-paying account on the same date?

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81952764#Comment_81952764

My understanding is that with most (all?) accounts the interest is accumulated (and compounded) daily, but only credited to the account monthly or annually*. In other words, the internal calculation is the same and there should be no difference in the amount of interest between closing an annual or a monthly account on the same day provided the monthly interest is reinvested.

I agree that the tax situation does add an element of complexity.

* For example, for an AER of 5%, the daily interest rate is 1.05^(1/365)~0.013368%. Assuming the account was opened at the beginning of 1 January with £10k and closed at the end of 15 February, there will be 46 days of interest due and a final balance of £10061.68, i.e., (1+0.013368/100)^46, in both cases. Of course, the monthly interest account would have been credited with 31 days of interest at the end of January so would have a balance of £10041.52 at the end of that month, while the annual account would only have an apparent balance of £10000.