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Old 29-09-2007, 18:56
barmy_army008
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Having been advised on here, I recently sorted out an ISA. The advisor (or whatever they're called) at my bank said I could have monthly or annually interest paid.

The ISA is currently quite a way off the 3000, but there is a slim possibility that I might use the money before April and I thought that it might be better if I had the monthly interest incase I had nothing in the account at the end of the tax year.

I said this to them, and they gave me some confusing information about interest being calculated daily so implying that it wouldn't matter if the ISA wasn't full in April, so now i'm a bit confused.

I assumed that annual interest would be paid on the amount in the account at the end of the tax year. But daily thing calculation has now made me think that this isn't the case. Could anyone explain how it works for me? Thanks.
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Old 29-09-2007, 21:43
seacam
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Hello Barmy,

Yes let's see if I can help.

What you should have is a an instant mini Cash ISA.

The interest is calculated daily, it means you can withdraw funds, hopefully without penalty.

If you withdraw, you can't make it back up for that tax year.

So if you had three thousand in and withdrew 500 you couldn't then pay back in 500.

However you do need to check you have an instant access cash ISA, many will allow you to pay in but not withdraw for the full tax year.

There are a couple of society's that offer what they call a monthly interest paying ISA but it's not really an ISA.

Who is it with and I'll take a look.
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Old 29-09-2007, 22:26
Errodiel
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Just to clarify:

the bank will calculate the interest daily, on whatever's in the account. But they won't PAY you the interest til the end of the year (or month, if you chose that). Often they'll give you a slightly better rate if you choose annual interest. So if you had cash in there all year, but take it all out one day before the end of the tax year, it doesn't matter - you'll still earn interest for the time the cash was actually in the account. Hope that helps
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Old 30-09-2007, 15:07
barmy_army008
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Thanks for the info.

So, does this mean that when its quoted as 6% or whatever interest, that interest is split into 365 daily little amounts, which by the end of the year would be the equivalent of 6%?

If thats right, then i've somewhat naively hugely overestimated how much interest i'm going to get! I assumed that it would be 6% of whataver was in at the end of the tax year ie, hopefully 6% of 3000.

So, would this mean that its in my interest (excuse the pun) to put as much money into the ISA as I can as soon as possible? Or have I misinterpreted?
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Old 30-09-2007, 16:07
Errodiel
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You're dead on. But remember that once you've used the full 3000 allowance, once you take some out you can't put it back. It's kind of like tactical warfare, planning your strategy! But yes, if you deposit the max 3000 at the start of the tax year, when the interest is paid you'll have earned 6% interest on the whole lot - 1.06 x 3000 = 3180. Not too shabby!
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Old 30-09-2007, 17:59
DRY_SWEEPER
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Having been advised on here, I recently sorted out an ISA. The advisor (or whatever they're called) at my bank said I could have monthly or annually interest paid.

The ISA is currently quite a way off the 3000, but there is a slim possibility that I might use the money before April and I thought that it might be better if I had the monthly interest incase I had nothing in the account at the end of the tax year.

I said this to them, and they gave me some confusing information about interest being calculated daily so implying that it wouldn't matter if the ISA wasn't full in April, so now i'm a bit confused.

I assumed that annual interest would be paid on the amount in the account at the end of the tax year. But daily thing calculation has now made me think that this isn't the case. Could anyone explain how it works for me? Thanks.
All bank accounts are run on daily interest, this is so that they only pay you interest on what you have in the account at any given time

If its calculated on the last day of every month they will end up paying you interest for money you havent had in the account for the full month, which would be a money earner for those who have a 6% current account

The monthly/yearly interest is an option that you have of when you would like to see the interest

By having monthly interest on 3k or less in an ISA is really pointless, I mean what are you going to spend the 12.50 on

Monthly interest is for those who have a large amount of money in the bank like 1m and tey live off of the interest and dont work
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Old 30-09-2007, 18:00
DRY_SWEEPER
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You're dead on. But remember that once you've used the full 3000 allowance, once you take some out you can't put it back. It's kind of like tactical warfare, planning your strategy! But yes, if you deposit the max 3000 at the start of the tax year, when the interest is paid you'll have earned 6% interest on the whole lot - 1.06 x 3000 = 3180. Not too shabby!
But if you dont put in the full 3k at the beginning of the year you wont get nowhere near that amount hence why they calculate interest on a daily basis
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Old 30-09-2007, 18:31
pad
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You're dead on. But remember that once you've used the full 3000 allowance, once you take some out you can't put it back. It's kind of like tactical warfare, planning your strategy! But yes, if you deposit the max 3000 at the start of the tax year, when the interest is paid you'll have earned 6% interest on the whole lot - 1.06 x 3000 = 3180. Not too shabby!
You might actually earn a teeny bit (and I mean teeny bit) more than that because in the course of the year you would also earn interest on the interest paid.. This is called compounding, and gives a slightly difference interest rate.

Financial products often give two interests rates, the APR (annual percentage rate) which assumes interest is calculated once per year and the AER (annual equivalent rate) which takes into account the interest earned on interest.

3,000 for one year at an APR of 6.0% would generate an AER of about 6.18% and you'd earn about 5.50 extra.

p.
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Old 30-09-2007, 18:36
Errodiel
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You might actually earn a teeny bit (and I mean teeny bit) more than that because in the course of the year you would also earn interest on the interest paid.. This is called compounding, and gives a slightly difference interest rate.

Financial products often give two interests rates, the APR (annual percentage rate) which assumes interest is calculated once per year and the AER (annual equivalent rate) which takes into account the interest earned on interest.

3,000 for one year at an APR of 6.0% would generate an AER of about 6.18% and you'd earn about 5.50 extra.

p.
Ah, but if they don't pay the interest til the end of the year, surely you won't get compound interest? The interest won't have been added to the balance, and therefore won't be taken into account for subsequent interest calculations. At least that's my understanding!
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Old 30-09-2007, 18:49
pad
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Ah, but if they don't pay the interest til the end of the year, surely you won't get compound interest? The interest won't have been added to the balance, and therefore won't be taken into account for subsequent interest calculations. At least that's my understanding!
Hmm, fair point... that's a smallprint thingy

p.
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Old 30-09-2007, 18:57
barmy_army008
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Thanks for the information everyone. Thats finally cleared that up. The bank advisor kept saying about this daily interest when I asked about monthly/annual payment but didn't really elaborate on what it actually meant so I became very confused.

Just out of interest, to calculate the daily rate is it just 6 divided by 365? I make that about 0.0143%. So, on 3000 (which I don't actually have yet) it would be around 43p a day?

I didn't realise that all forms of interest were calculated daily. When they advertise say 1.5% interest on an account I always thought it meant that tou would get 1.5% of whatever was in the account at the end of the month. Obviosuly the banks aren't doing anything wrong by advertising these ratesas they do, but it is deceptive to someone who isn't in-the-know.
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Old 30-09-2007, 19:15
10past3
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It's not deceptive - the interest accrues on the actual amount in there every day, rather than an averaged amount over the month or even year.

The monthly rate should be a little lower than the annual rate to compensate [the bank] for the compound interest that's added monthly rather than once at the end of the year.

Overall it won't make a huge difference either way on 3k.
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Old 30-09-2007, 19:17
DRY_SWEEPER
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Thanks for the information everyone. Thats finally cleared that up. The bank advisor kept saying about this daily interest when I asked about monthly/annual payment but didn't really elaborate on what it actually meant so I became very confused.

Just out of interest, to calculate the daily rate is it just 6 divided by 365? I make that about 0.0143%. So, on 3000 (which I don't actually have yet) it would be around 43p a day?

I didn't realise that all forms of interest were calculated daily. When they advertise say 1.5% interest on an account I always thought it meant that tou would get 1.5% of whatever was in the account at the end of the month. Obviosuly the banks aren't doing anything wrong by advertising these ratesas they do, but it is deceptive to someone who isn't in-the-know.
theres another twist in it as the interest is compounded so you earn interest on interest thats why you get slightly less rate by having monthly interest to annually as you will be taking some of the money
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Old 30-09-2007, 19:24
barmy_army008
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It's not deceptive - the interest accrues on the actual amount in there every day, rather than an averaged amount over the month or even year.

The monthly rate should be a little lower than the annual rate to compensate [the bank] for the compound interest that's added monthly rather than once at the end of the year.

Overall it won't make a huge difference either way on 3k.
Perhaps deceptive is the wrong word, but had I not asked on here then I probably would've gone along assuming that the 6% interest would be calculated on only how much is in the ISA in April. Thats why I thought I was going to get much more interest than I actually am (although it'll still be a nice amount).

They don't make it obvious that the 6% is cumulative and that its actually calculated daily, although I suppose that they're just looking out for themselves and I should really be more clued up on this kind of thing.
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Old 30-09-2007, 20:59
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Perhaps deceptive is the wrong word, but had I not asked on here then I probably would've gone along assuming that the 6% interest would be calculated on only how much is in the ISA in April. Thats why I thought I was going to get much more interest than I actually am (although it'll still be a nice amount).

They don't make it obvious that the 6% is cumulative and that its actually calculated daily, although I suppose that they're just looking out for themselves and I should really be more clued up on this kind of thing.
If it worked like that someone who put 3k into their account on the 31st March would get the same as someone who put the 3k in the year before.
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