Today's official statistics see the Consumer Prices Index drop from 2.7% to 2.5% in March. As inflation is now back to being below the highest savings rates, those who prefer to have their interest paid on a monthly basis may want to think again.
The main reason people choose a monthly interest account is to get an income from their savings pot, with the money added through interest paid into their current account on a monthly basis. Some people may also choose a monthly interest account whereby interest stays in the pot, in the hopes of gaining a bit more over the long run as interest becomes compounded.
Annual interest rates are usually higher than monthly interest options, but the gap found between them today, especially when it comes to fixed bond rates, could see savers miss out on much higher returns. Additionally, there is less choice when it comes to monthly interest savings accounts, so savers will have to be savvy when making their choice.
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"One of the main reasons for there being less monthly interest options is likely down to the cost of providing the service, and the payment of additional interest in comparison to an account that pays interest yearly," explained Rachel Springall, finance expert at moneyfacts.co.uk. "Savers are also more likely to find a monthly interest account with a challenger bank than they are with a familiar high street brand."
Indeed, Rachel points out: "There are some cases where the rates are not too dissimilar, such as Wyelands Bank's two-year bond, which pays 2.15% on its anniversary or 2.13% monthly. However, after a two-year period, a customer saving £10,000 in a 2.13% account would still be £0.09 better off than if they had chosen the 2.15% yearly rate."
It's a different matter in the easy access market. Not only does the best monthly interest option in the market pay just 0.01% less than its annual rate, with RCI Bank UK paying 1.29% monthly or 1.30% on its anniversary, but the reasoning is different as well. With an easy access account, you may want to move your funds before the year is up, in which case you'd have some interest to take with you from a monthly interest account, but probably not with an annual account.
Overall, it's a good time to take a look at the savings market, as rate rises outweighed cuts for the 15th consecutive month, with 114 rises compared to 49 cuts in March. Of these, 55 rises and 16 cuts were for ISAs. Thanks to the decrease in inflation and continued rate rises, there are now plenty of long-term fixed bonds to choose from that pay a rate above inflation, including some monthly interest-paying options.
Unless you're looking to switch easy access accounts, however, it may still be prudent to wait a little while longer, as savings rates may well rise further thanks to another upcoming base rate rise, which may take place as early as next month, and the recent closure of Government lending schemes.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.