interest must be paid away

bestcheck

Examining basic details of potential fixed rate savings bonds listed at another website, the term 'interest must be paid away' often appears. Alternatively, the term 'interest may be paid away or compounded' is also used.

Can someone explain the implications of these terms please? I know many savings accounts require a 'deposit from/withdrawal to' account to be named, but I would expect even monthly interest to be compounded automatically (rather than 'paid away') unless I specifically request it paid to another account.

liitleblackcat

Interest must be paid away means that the interest can't be kept in the same account. Interest may be paid away or compounded means that it can either be paid into another account or remain in the same account and then will have compound interest applied to it. In this case, it is your choice whereas in the first case you don't have a choice.

Unless you need the interest as an income, it is usually better to leave the interest where it is as the compounding effect helps to increase your capital.

bestcheck

Thanks for explanation, lbc. It's as I thought, and seems a little deceptive of the banks/BSs. Compound maths is not my forte. If I put £10,000 into a 6.5% gross pa one year Bond I'd estimate £10,650 on maturity (currently I'm non-tax). Could you kindly help me by indicating how this outcome would be affected by a) interest being paid away and b) interest being compounded? Is this only relevant if I choose monthly interest? Do I need to look at AER instead?

liitleblackcat

The AER takes into account the fact that monthly interest remains in the account and is compounded and annual interest isn't (because it is only paid once at the end of the year). Most accounts actually calculate interest daily but only credit to your account monthly or annually except when you close the account.

One year bonds will generally (always?) pay interest on maturity so the interest being paid away or compounded will not make any difference. If the one you are looking at pays interest monthly, the interest rate will be less than if it is paid annually - such that you end up in the same place at the end of the year.

It won't actually make any difference whether interest is paid monthly or annually unless you take the monthly interest as income in which case you will have taken money out of the bond and there will only be £10k at the end of the year. If you leave it in, you will have £10,650 at the end of the year if the AER is 6.5%.