Confusion over Nationwide e-Bond

grhmb

Hello,

I have £1,000 that I'd like to invest and have opted to put this in a Nationwide e-Bond. I'm a student and don't earn enough to pay tax, so by completing an R85 form and not being taxed on this amount, I think it works out more profitable for me than an ISA.

Assuming I am right, and assuming that this is indeed a good place to invest my £1,000, I'm a little confused over which option I should choose. When setting it up, I'm offered two choices:

1 Year 6.6% gross p.a/6.6% AER [Annual Interest Added to Bond]

OR

1 Year 6.4% gross p.a/6.59% AER [Monthly Interest Added to FlexAccount]

The first option looks good because the interest rate is a) higher, and b) added to the bond. However, if it's added to the bond at the end of the year, I don't think I'm earning any interest on the interest (if that makes sense.

The second option has a lower rate but the interest is added monthly in to my current account. Presumably I could then pay the interest in to an online saver account and earn interest on the interest.

What are your thoughts? Any advice would be appreciated.

aleph_0

AER is the amount of interest you would get if you left the money in the whole year. The monthly account you can't do this on of course, but the AER rate (6.59%/6.6%) is the rate that you would get if you could, and is the rate to compare. So *if* the 6.4% was paid monthly and added to the account, then interest on interest would give you 6.59% interest at the end of the year.

So basically, there is no difference to the final amount you get, and if you don't need the interest to arrive early, you might as well go for the Annual option.

They should really have taught these things in schools (and I'm a student as well before someone tells me off for lecturing the yoof).

KeithEssex_2

grhmb wrote: »

Hello,

I have £1,000 that I'd like to invest and have opted to put this in a Nationwide e-Bond. I'm a student and don't earn enough to pay tax, so by completing an R85 form and not being taxed on this amount, I think it works out more profitable for me than an ISA.

Assuming I am right, and assuming that this is indeed a good place to invest my £1,000, I'm a little confused over which option I should choose. When setting it up, I'm offered two choices:

1 Year 6.6% gross p.a/6.6% AER [Annual Interest Added to Bond]

OR

1 Year 6.4% gross p.a/6.59% AER [Monthly Interest Added to FlexAccount]

The first option looks good because the interest rate is a) higher, and b) added to the bond. However, if it's added to the bond at the end of the year, I don't think I'm earning any interest on the interest (if that makes sense.

The second option has a lower rate but the interest is added monthly in to my current account. Presumably I could then pay the interest in to an online saver account and earn interest on the interest.

What are your thoughts? Any advice would be appreciated.

The other important thing to bear in mind is that if you elect to have interest paid monthly then part of it will constitute income for the tax year 2008/9 and part of it for the tax year 2009/2010. If you are unlikely to use all of your personal tax allowance this year then the monthly option may be helpful in reducing your tax liability should you have any significant income in the following tax year.

Another thought, as you are a student - can you really be 100% sure that you will not need access to your money for a whole year ? You might simply be better holding it in a high paying easy access account (e.g. Birmingham Midshires).

Milarky

With Nationwide, monthly interest looks a bit different to all the other banks/building societies I am aware. They work out the interest on the balance from about 25th of one month to the 24th of the following month. But they 'credit' this amount around the 1st.

Everyone else does the common sense thing of working out interest until the last day of the month and paying the the next day. But NW can't (or won't) manage this. The result won't affect the OP - who has a fixed amount - but it does cause fluctuations in monthly interest for someone with their '60+' account. My mum was not paid interest two months running because an 'overpayment' had occurred just before where she drew down the balance in the last week of the month - and they held back interest subsequently earned until she was 'in credit' again.

This system reminds me of the Inland Revenue (pre Gordon Brown era) which used to send my parents notifications of their Tax Codes for employer pension purposes each January - based on the previous year's personal allowances - only to have those allowances (and with them, the 'Tax Code') change two months later when the Budget took place. Yeah, like they couldn't do it any other way - so they had to send every pensioner TWO notice of codings each year...