What is my monthly income from savings?

10 October 2018

Q

How do savings accounts that provide a monthly income work? I have £150,000 to deposit and would like to receive a monthly payment from this. However, I can’t work out how payments are calculated. If an account pays 1%, does that mean I’d receive £1,500 a month?

From
GA/Manchester

A

A monthly income savings account is much like a standard savings account. You deposit money into the account and in return the bank or building society pays you interest. The key difference is you get your interest paid to you monthly, rather than the usual annual payment.

I’m afraid you won’t receive £1,500 a month. The advertised interest rate on these accounts is the amount of interest you will receive over the year. You will get that paid out monthly over the 12 months. So on £150,000 in an account paying 1% interest, you would receive £125 a month: £150,000 divided by 100 = 1%, or £1,500, then £1,500 divided by 12 = £125.

As with any savings account, the longer your lock your money away, the better the return. But, given that the Bank of England has increased the base rate, you may not want to lock your money away for a long period as you could miss out if banks follow suit and put up their savings rates.

Top monthly interest savings accounts

AccountTermInterest rateMin. depositMonthly return on £10,000
Paragon Bank120-day notice1.80%£5,000£15
Coventry Building SocietyInstant access1.4% (inc 0.25% 12-month bonus)£50£11.66
Atom BankOne-year2%£50£16.67
Tandem BankThree-year2.40%£1,000£20
Masthaven BankFive-year2.69%£500£22.33

Source: Moneywise, 14 September 2018