A&L - Interest Payment Date Question

Jackies

I've just been looking at the A&L Direct Saver 4 ISA which is 6.25%

When I was read the terms and conditions it says that interest it paid annually on the 1st of January....is it me or does that seem weird for an isa seeing as every other one I look at appears to pay out in March/April

Financially would I be at a disadvantage, in terms of amount earned, if I was to go with them over someone who paid the interest later in the year?

KTF

The interest is paid in January so you would get the interest for 2008 paid in January 2009 and when you close/transfer the account (say in April 2009) you get interest for the first 3 months of 2009 added on then.

The interest you get paid is exactly the same as an ISA that adds the interest in April.

Jackies

KTF wrote: »

The interest is paid in January so you would get the interest for 2008 paid in January 2009 and when you close/transfer the account (say in April 2009) you get interest for the first 3 months of 2009 added on then.

The interest you get paid is exactly the same as an ISA that adds the interest in April.

ok so I was just being dim lol!

Thank you

YorkshireBoy

KTF wrote: »

The interest you get paid is exactly the same as an ISA that adds the interest in April.

I don't think that's correct KTF. Since interest is calculated daily, you'll be earning 'interest on interest' between January and March 2009 once the interest has been capitalised on 1st January.

KTF

Ah, thats a good point but if the AER is the same as an account that pays interest in April wont the amount earned be the same?

YorkshireBoy

KTF wrote: »

Ah, thats a good point but if the AER is the same as an account that pays interest in April wont the amount earned be the same?

You always earn interest at the gross p.a. rate. The AER is an illustrative figure...

"The Annual Equivalent Rate illustrates what the interest rate would be if interest was paid and compounded once each year."

The key word is "would".

Jumping_Bean

So are they the same or does monthly interest pay more? I always thought they were the same.

Jumping_Bean

YorkshireBoy wrote: »

"The Annual Equivalent Rate illustrates what the interest rate would be if interest was paid and compounded once each year."

The key word is "would".

I always thought that interest on annual accounts was still compounded as with monthly accounts, but the calculation and balance didn't show this until the end of the year.

So are you saying that if I was to place £1000 in a 6% AER annual account I would have less after 1 year than if I placed it in a 6% AER monthly account?

jamesd

YorkshireBoy is wrong. The interest will be identical. In both cases you get daily compounding regardless of whether the interest is added to the visible account balance once a year, once a month or at odd days in between. This is completely standard compound interest calculation and it's irrelevant whether the money has been added to the account balance or not.

The timing of the interest being added does make a difference if it's a taxed account, in which case the monthly version pays a bit less interest than the annual, because you lose the interest compounding on the tax deducted from monthly interest.

YorkshireBoy

jamesd wrote: »

YorkshireBoy is wrong.

What exactly is "wrong" James, in the context of the OP's question?

The question was would they be disadvantaged by interest paid on Jan 1st, as opposed to the 'more normal' end of tax year.

I believe depositing a lump sum for a tax year in this A&L ISA account would pay more interest than an account with the same rate but which didn't pay (capitalise) it's interest until the end of the tax year.

OP would earn daily interest from now until December 31st at the rate of...

initial deposit x 6.25% / 365.

From January 1st next year, they would earn daily interest at the rate of...

(initial deposit + interest capitalised on Jan 1st) x 6.25% / 365


So...

£3,600 deposited on 6th April this year, in an account which paid interest on 5th April next year would earn...

£3,600 x 6.25% / 365 x 365 = £225.00


However, the same £3,600 deposited in the A&L account would earn...

£3,600 x 6.25% / 365 x 270 = £166.44 (Apr 6th to Dec 31st)

(£3,600 + £166.44) x 6.25% / 365 x 95 = £61.27 (Jan 1st to Apr 5th)

Total interest = £166.44 + £61.27 = £227.71 ie £2.71 more

...and that's equivalent to an AER of 6.325%


So, to the point made in my second post, the AER is 'illustrative' in that it relates to the interest that would be paid if it was capitalised once per year at the end of the year...and it's not with the A&L account.


If my understanding is wrong, I'd be grateful if you could explain why.

Jumping_Bean

YorkshireBoy wrote: »

What exactly is "wrong" James, in the context of the OP's question?...

...I believe depositing a lump sum for a tax year in this A&L ISA account would pay more interest than an account with the same rate but which didn't pay (capitalise) it's interest until the end of the tax year...

...(initial deposit + interest capitalised on Jan 1st) x 6.25% / 365

But I thought the whole point of daily compound interest was that it was "capitalised" daily. Not yearly or monthly or on any given date, but daily. As far as I know this is completely different and distinct from when the account balance is merely updated which is what the OP is talking about.

YorkshireBoy wrote: »

So, to the point made in my second post, the AER is 'illustrative' in that it relates to the interest that would be paid if it was capitalised once per year at the end of the year...and it's not with the A&L account.

Any 2 ISA accounts with the same AER pay the same amount of interest in a given time. This doesn't matter whether it's yearly, monthly, on the 1st Jan, 1st April or 1st August, they pay the same. What would be the point of AER if it was not directly comparable? It would be worthless.