Choosing Monthly or Annual Interest Payments with Your Savings Account
The whole point of opening a savings account is to profit from your investment by earning interest. Some accounts pay this interest on an annual basis, while others pay it monthly, and this is one of the many factors you need to consider when choosing an account. But which is better - monthly or annual interest?
Compound Interest?
At first glance, monthly interest would seem to be the better option, as you'll get your earnings more quickly, and you'll also begin to earn compound interest sooner (i.e. earning interest on your interest).
As always in finance though, things aren't necessarily so simple. For a start, accounts offering monthly interest will tend to have a lower headline interest rate than those paying annually - you can clearly see this with accounts that give you the choice, as the monthly option will usually offer a slightly lower rate.
With this in mind, how can you work out whether it's worth trading the slightly lower interest rate for the more frequent payments, and the potential earnings from compound interest?
Annual Earnings Rate (AER)
The figure you need to look for is the AER or Annual Earnings Rate, which is a calculation of how much interest the account will earn over the course of a year. It takes into account the issue of compound interest, Thus, accounts with the same AER figure will earn the same in interest over the course of a year, whether it is paid annually or monthly.
So are there any reasons to choose monthly interest over annual, if the AERs are the same?
Bonus Savings Rates
Firstly, some accounts offer short term bonus interest rates, where the rate is higher for an introductory period before reverting to lower standard rate. If this introductory period is less than a year, then it makes sense to choose monthly payments so that you can get your interest while the rate is high, before withdrawing your funds when the rate drops down.
Income
Also, if you have a substantial sum to invest, monthly interest payments can provide you with an income, which may be very useful for retired people, for example.
Compare AERs
Other than these two cases, there's really little to choose from between monthly and annual interest so long as the AER is the same, so always use this figure rather than the headline interest rate when comparing accounts.
Featured Monthly Interest Accounts:
| Alliance & Leicester eSaver | 6.50% | £1 | £500,000 | More >>> |
| ICICI Bank HiSave | 6.16% | £1 | £0 | More >>> |
| Citibank Flexible Saver | 5.58% | £1 | £1,000,000 | More >>> |
Featured Annual Interest Accounts:
| Capital One Bonus Saver | 6.05% | £500 | £1,000,000 | More >>> |
| Post Office Instant Access | 5.75% | £500 | £1,000,000 | More >>> |
| Sainsbury's Internet Saver | 5.50% | £1 | £2,000,000 | More >>> |
