Interest added monthly or yearly?

What are the advantages of having interest added to savings on a monthly basis but at a lower rate?

Presently Alliance & Leicester offer an "Online Saver" where on savings of £1 and up they offer gross interest @ 5.35% AER 5.35% Net 4.28% with the interest added annually (presumably this would be at the end of a year of deposit rather than a financial year?)

Cahoot Savings Account online offers gross interest @ 4.98%, AER 5.10%, Net 3.98% and this is added monthly.

Also what is AER?

AER = Annual Equivalent Rate

AER

AER stands for Annual Equivalent Rate and illustrates what the interest would be if interest was paid and compounded each year. On accounts where interest is paid quarterly, this will be slightly higher than the quoted gross rate because of the compound interest earned on the interest paid during the year.

As every advertisement for a savings account shows the AER you can easily compare what return you can expect from your savings over time. The gross rate is the contractual rate of interest payable before the deduction of income tax at the rate specified by law. Net is the amount of interest which would be payable after allowing for the deduction of tax specified by law (currently 20%).


(Thanks to the Halifax)

AER = Annual Equivalent Rate

Thanks for that definition AidanC! It looks as if the "added monthly" deal is the best. Makes me wish I'd paid attention when compound interest calculation was being taught in school!

Re: AER = Annual Equivalent Rate

I don't think your question has been answered correctly. Interest on all savings is calculated daily and compounds daily. The question is when is the interest credited to your account, so that you can withdraw it and go off and spend it.

If interest is credit monthly, you can withdraw it monthly. If it's credited annually, you only get your hands on it once a year. That's why people who opt for monthly crediting of interest generally get less of it.

Unless you need the interest to supplement your income during the year, you should only have it credited once a year.

Re: AER = Annual Equivalent Rate

moneybags is right. forget about the gross rate and go for the highest AER. otherwise you're effectively paying a penalty to be allowed to withdraw the earned interest in twelve installments. this "facility" is of little practical use.

AER = Annual Equivalent Rate

Hi Moneybags and Darag

That is very interesting! It's counter-intuitive to wait for the annual credit to be added if there's an option of 'monthly-added interest' because you (or at least I!) visualise the next tranch of interest will be based on the compound, therefore that must be the best deal. I wouldn't have based my choice on the highest AER as I didn't know what it meant.........and I had no idea interest earned was on a daily basis (though I've experienced that from the other side having just had to pay a small fortune on early repayment of a building society loan as the interest was what they described as "front loaded" (something I wasn't clear of the implications of when I signed the paperwork).

Thanks for this valuable help and education!