As the names suggest, a key difference between monthly and annual interest is how often it’s paid. Monthly interest is paid on the same day every month, whereas annual interest pays all the interest you’ve earnt over a year in one lump sum.
Some providers can only make payments Monday – Friday and so the day you receive your interest may differ.
The interest rates between monthly and annual interest accounts will also differ. The AER changes because annual interest accounts benefit from compounded interest (the interest you earn on the interest you’ve already earned). With an account that pays monthly, interest is paid directly into your nominated bank account each month and is essentially withdrawn from your savings account. In contrast, an annual interest account will still earn interest each month but this interest will stay within the savings account. So, you’ll earn interest on the interest itself the following month. Over a year that results in a higher amount of interest overall as your balance (the amount you’ll earn interest on) increases each month.