ICEsave interest question (annual/monthly)

big_mortgage

Is ICESAVEs interest amount the same:

5.89% monthly
6.05% annual

as the AER is 6.05% for both.

ie do you get more for opting for annaul interest?

LongTermLurker

big_mortgage wrote: »

Is ICESAVEs interest amount the same:

5.89% monthly
6.05% annual

as the AER is 6.05% for both.

ie do you get more for opting for annaul interest?

AER is the Annual Equivalent rate. If you choose to get paid interest annually, you get 6.05%

If you choose to get interest monthly and don't touch the interest, at the end of the year you will have 6.05% due to compounding

If you choose to get interest monthly and take out the interest, at the end of the year you will have been paid 5.89% interest, because you aren't getting interest on the previous months' interest.

HTH

brownbabygirl

LTL that was soooooo helpful! I had always wanted to know!

big_mortgage

LTL thanks

but shouldn't the AER for monthly interest be lower if the monthly gross is lower. Or are they trying to 'reverse' the calculation to show it a different way?

Graeme7777

Hi,

No, the AER should be the same because you are earning around 49 basis points per month which compounds to 6.05% over the course of the year.

LongTermLurker

big_mortgage wrote: »

LTL thanks

but shouldn't the AER for monthly interest be lower if the monthly gross is lower. Or are they trying to 'reverse' the calculation to show it a different way?

The keypoint is the letter "E" - the reason behind quoting AER is to show the equivalent (ie same) annualised rate.

Imagine you had £10 in January and they gave you £1 interest - in Feb, they would pay you interest on your original £10 plus the £1 earned, so interest on £11. If you did that all year long, at the end of the year you would get the same interest as if they had just paid you in 1 lump sum. Hope that makes sense.

See this http://www.moneysavingexpert.com/banking/interest-rates#compound

big_mortgage

thanks,

i thought I understood this...

so no matter what you choose, they pay the same interest?

YES or NO?

brownbabygirl

big_mortgage wrote: »

thanks,

i thought I understood this...

so no matter what you choose, they pay the same interest?

YES or NO?

I think the answer is YES.

LongTermLurker

big_mortgage wrote: »

thanks,

i thought I understood this...

so no matter what you choose, they pay the same interest?

YES or NO?

So long as the AER is the same AND you don't withdraw any interest, yes.

KeithEssex_2

One thing to also consider is whether your tax/income situation may be different in this or the next financial year. Sometimes opting for a particular choice can help you save money.

For example if you are expecting to have a significant change in your income over the next 12 months (e.g. retirement, maternity etc.). This might mean that you are taxed at 40% in one year but 20% in the other. So by opting to receive the interest in the year where you are taxed the least you may be able to make a significant tax saving.

Paul_Herring

big_mortgage wrote: »

thanks,

i thought I understood this...

so no matter what you choose, they pay the same interest?

YES or NO?

Not normally. But in the whole scheme of things the differences are small.

Numbers below assume

• £1000 invested
• "6.00%AER" equates to 5.84 Gross on monthly, 6.00 Gross on yearly. (Different from ICESave's rates only because the spreadsheet linked below has been used in other threads.)
• Starts on Jan 1
• Monthly interest credited on the 1st of the following month
• Interest rounded off to nearest penny.

They are identical if all three of these are true.
1) You don't pay tax on the interest at source. If you pay tax, opt for yearly. You'll lose 27p if on monthly if you're a 20% tax payer, 39p if 40% (Most are taxed at source at 20% unless they've filed for gross interest)
2) You don't withdraw the interest if paid monthly. Withdrawn money obviously reduces interest.
3) You leave it in for a full year. If you withdraw/close early, you'll have earnt more on annual - If you withdraw after 6 months non-tax payer loses out by 68p, 20% loses 61p , 40% loses 50p

If given the choice, and you don't need the monthly interest for income, say, opt for yearly interest, but as I pointed out at the start, it's only pennies per £1000.


See http://spreadsheets.google.com/pub?key=pNBpCyyhhED0L42bCUZCgWA for where I got the numbers from for #1 and #3