Savers Lose Out On 12.5% Interest With Accounts That Pay Monthly



Savers Lose Out On 12.5% Interest With Accounts That Pay Monthly

If you choose a savings account that pays out each month as opposed to each year, you could be missing out on up 12.5% interest when compared to accounts that pay out yearly.

This comes as a result of the new savings allowance, to be introduced in April, that now allows people to avoid tax on their first £1,000. If you are a higher tax rate payer, you can go tax free for your first £500 saved. 

What this means is that if you were to open a new account which receives annual interest, you will not need to pay any tax on it because you won't receive it until August 2016.

However if you were to choose an account that pays out based on monthly interest, you would stand to lose out because of the fact that you would need to pay tax each month up until April 2016. This loss is compounded by the fact that most savings accounts pay out less interest when it is monthly anyway.

If you were to place £10,000 into a one year account with a fixed rate of interest of 2%, you would earn £200 in one year.  However if you were to choose exactly the same deal but received your interest monthly, you would only receive £174.90.

Only some banks allow people the choice between taking interest monthly or taking it yearly. Two financial providers that do offer this choice are Nationwide and Virgin Money.

Monthly interest payments tend to be popular amongst older people due to the fact that they can use this income to put towards their bills or supplement their pensions.

The Virgin Money Defined Access Saver account offers 1.5% interest through a branch managed account or online.  However this account does limit you to a maximum of three withdrawals every year.  Kent Reliance offer an account with 1.44% interest that has no limit to the amount of withdrawals that the customer can make. 

Charter Saving Bank offer a new one year fixed rate deal that pays out a rate of 2.04% with an online account. Halifax also offer a relatively good deal with their eighteen month tracker bond - paying 1.93% at the current base rate. The fact that this account will be tracking the base rate means that it will be fixed to a certain level above whatever interest rate is set by the Bank of England.

This deal is better than the ones that you can currently find on the High Street - including a 1.6% deal from Nationwide and a 1.64% deal from Virgin Money. 

There are also a few ISAs that will pay out monthly interest.  The most competitive deals of this kind are the Virgin Money Defined Access ISA which offers 1.5% and the Shawbrook Bank pays 1.74% fixed for one year.

It is important to remember that the base interest rate is set to rise in the next year so one should be wary of locking in interest rates for much longer than this.

Danny Cox from Hargreaves Lansdown, the independent financial advisor, said:

'Don't fix for more than a year and go for annual, rather than monthly, interest.'

'Keep sufficient funds in an easy-access account to cover the interest you would have otherwise seen each month.'

Make the most of your money by comparing savings accounts with MoneyExpert.