Notice account (Notice deposit) is a type of savings account that prohibits from withdrawing the money without informing the bank first. To take a particular amount of money from this type of account, you need to inform the bank in advance and wait for an agreed period, usually 30, 60 or 90 days (CII Diploma 2011, s. 105).
Violating the terms of notice account agreement, so withdrawing the money before the agreed time imposes a penalty on the account holder (Code of Federal Regulations 1982, s. 168). The account holder may also lose interest from the deposited money when withdrawing it before the set time (CII Diploma 2011, s. 105).
Advantages and disadvantages of notice accounts
Banks compensate notice account holders the requirement to give notice by providing higher interest rates for notice accounts. However, investors considering locating their assets in notice accounts should carefully weigh the advantages of the higher account rate against the main disadvantages, which are the possible:
- “loss of liquidity”
- “cost of penalties if the money needs to be withdrawn earlier than planned” (CII Diploma 2011, s. 105).
Variation of interest
Banks have the right to change the interest rates of any saving accounts on condition that they inform the deposit owner and give proper, in the circumstances, notice period before the alteration becomes effective.
Interest is paid upon withdrawal of the total balance but it is important to notice that both parties can agree to different “frequency of payment or capitalization of interest amounts prior to full repayment” when opening the notice account. It is common practice that banks capitalize and repay notice account interest at the end of the month as it is easier in terms of synchronizing this process with other administrative tasks (P. Parker 2003, s. 42-43).
Notice account interest will be a bit higher than the interest that is paid monthly because notice accounts have increased frequency of interest payments. When interest is credited more often, “the interest itself will begin to earn interest as soon as it is credited” (CII Diploma 2011, s. 105).
Comparing notice account and instant access account
Andy wants to place a sum of $20,000 on a deposit. He has two [[options]] available: * Instant Access account where interest is capitalized annually at 3.5%. * Notice account where he would have to wait 90 days before withdrawing the money. The notice account's rate is 4% annually. However, for immediate withdrawal he would lose the interest from those 90 days. Considering the current rates of both accounts: * Andy will earn $700 annually from the Instant Access account, before taxation.
- He will earn $800 annually from Notice account, before taxation. In a situation when Andy has to withdraw the money from the notice account after one year, he will lose the following amount of money (before tax): $20,000 × 4,0% × 90 ÷ 365 = $197.26 In this circumstance the interest gained from the notice account is going to be lower than it would have been if Andy located his money on Instant Access account because: $800 - $197.26 = $602.74
$602.74 < $700
Notice from the above calculations, that it will take approximately two years before Andy can take advantage from placing his money on Notice account instead of on Instant Access account (CII Diploma 2011, s. 105).
- Code of Federal Regulations (1982), Banks and Banking, Published by the Office of the Federal Register National Archives and Records Service General Services Administration as a Special Edition of the Federal Register, s. 168.
- CII (2011/ 2012 tax year edition), Diploma in Financial Planning. J06 Investment Principles, Markets and Environment. Study Text. For exams set by the Chartered Insurance Institute (CII), BPP Learning Media, s. 105.
- Parker P. (2003), Mastering the ACI Dealing Certificate FT Prentice Hall Financial Times, s. 42-43.
Author: Justyna Szczepaniec