AER % interest and monthy paid interest

thebeak

Hello Everyone,
I understand how AER works (interest % as if interest was compounded monthly and paid yearly) Will you get the same amount of interest if you are paid it monthly and make no withdraws in the year?

Or is the idea that the bank pays you a little extra interest so they paid interest for you once a year?

neilp

I think the first thing you said is right, as the lower monthly rate would compound giving an overall higher rate for the year (ie the AER).

LittleVoice

However, it works only if you receive interest gross rather than nett (because the interest on interest earned is on nett not gross interest). (And also total interest may be a little less when interest is not earned on fractions of a pound.)

thebeak

What I was trying to get my head around was......Is it irrelevant if you have interest paid monthly or yearly, if you dont make any withdraws? As this will be the same amount?

LittleVoice

If the AER for monthly interest is the same as for annual interest rate, there won't be a significant difference in interest if you don't make any withdrawals.

As I said above though, it will make a difference if you are not registered to receive your interest gross.

So, do you earn enough to pay tax? If you do, stick with the annual interest, you will get more.

masonic

thebeak wrote: »

What I was trying to get my head around was......Is it irrelevant if you have interest paid monthly or yearly, if you dont make any withdraws? As this will be the same amount?

It won't be the same amount if you are a taxpayer. Monthly will give you slightly less (because there will be monthly withdrawals to the tax-man ).

PBA

If you're putting a lump sum into an account now, to be withdrawn in exactly a year, you'll get the same amount of interest either way. If you'll be making any transactions at all on the account over the year then you'll be better off with annual interest.

As a general rule of thumb, always go for annual interest unless you need to take a monthly income from your savings.

YorkshireBoy

PBA wrote: »

If you're putting a lump sum into an account now, to be withdrawn in exactly a year, you'll get the same amount of interest either way.

...only if you're a non-tax payer (as has already been stated).

If you'll be making any transactions at all on the account over the year then you'll be better off with annual interest.

Since interest is always calculated daily, and then either paid monthly (and compounded) or annually, and assuming the AER's are the same, I'd be interested to hear the logic behind this statement.

CLAPTON

Just to be clear

If you compare two different accounts, one has interest added yearly and one has interest compounded monthly and they both have the same AER then you get the same interest per year. (assuming that you make no withdrawals).

(OK some will say that there are slight difference due to tax but lets not complicate things.)

Now if you have two accounts one with interest added yearly and the other compounded monthly and with the same GROSS interest rate then the one compounded monthly will give a little more interest over the year.

masonic

PBA wrote: »

If you'll be making any transactions at all on the account over the year then you'll be better off with annual interest.

Surely it depends whether you're making deposits or withdrawals. Regular deposits favour annual interest because you get less interest initially so the effect of monthly compounding is less than for a static balance. But if you're making regular withdrawals, then a higher proportion of your total interest is paid in the first few months and so compounding would have a greater than usual effect.