What is AER?
Written by
Emily Tye
Reviewed by
Amy LancashireAER stands for annual equivalent rate. It shows what your savings would earn over a year, including any interest earned on interest. Because every account is measured the same way, the AER lets you compare accounts that pay interest at different times.
You'll see it on savings accounts, ISAs and fixed-rate bonds, written as something like '4.25% AER'. Banks and building societies follow industry guidance from their trade bodies, which says any savings advert that quotes an interest rate should also show the AER.
What does 3% AER mean in pounds?
An AER of 3% means £1,000 left in the account for a full year would earn £30 in interest, as long as the rate stays the same, you don't take any money out and the interest stays in the account.
AER | £1,000 | £5,000 | £10,000 |
|---|---|---|---|
2% | £20 | £100 | £200 |
3% | £30 | £150 | £300 |
4% | £40 | £200 | £400 |
5% | £50 | £250 | £500 |
These figures are before tax.
How does AER work?
Some accounts pay interest once a year and others pay it monthly. Once interest is paid into your account, it starts earning interest of its own, so at the same interest rate, the more often it's paid, the more you earn. The AER takes this into account, which is why it's the figure to use when comparing accounts.
For example, if two accounts both pay 4% on £10,000:
Account A pays interest once a year. You get £400 at the end of the year. That’s 4.00% AER.
Account B pays interest monthly. You get about £33 each month. From the second month, the interest you’ve already been paid earns interest too, so each payment is a little bigger than the last. By the end of the year you’ve earned about £407. That’s 4.07% AER.
How is AER calculated?
For an account that pays interest more than once a year, the formula is:
AER = (1 + r ÷ n)ⁿ − 1
Here, r is the gross interest rate as a decimal and n is the number of times interest is paid each year. For Account B above, that's (1 + 0.04 ÷ 12)¹² − 1 = 0.0407, or 4.07% AER.
What's the difference between AER and gross interest?
The gross rate is the interest rate the account pays before any tax is taken off. The AER takes that gross rate and shows what it would be worth over a year if the interest were paid and compounded once a year.
How the two compare depends on how often interest is paid:
Once a year: the AER and the gross rate are the same, so you'll sometimes see '4% gross/AER'
More than once a year: the AER is higher than the gross rate, because of compounding
What does AER variable mean?
AER (variable) means the provider can change the interest rate while your money is in the account, so what you earn could go up or down. Providers can do this for a range of reasons, including changes to the Bank of England's Bank Rate. Your account terms explain how and when you'll be told.
A fixed AER stays the same for the term you sign up to, such as 1 or 2 years, but you may not be able to take your money out until the term ends.
Why might I earn less than the AER?
The AER assumes a few things stay the same, so it isn’t a guarantee. You’ll earn less than it suggests if:
Your interest is paid out. Some accounts pay monthly interest into a different account, so it stops compounding.
You take money out. The AER assumes a single deposit that's left alone.
A variable rate is cut. The AER only reflects rate changes known at the start.
A bonus ends. If the AER includes a 12-month bonus, you’ll earn the lower standard rate after the first year.
You close a fixed-rate account early. Some charge the equivalent of a set number of days' interest, which the AER doesn't reflect.
You pay tax on the interest. The AER is before tax.
What's the difference between AER and APR?
AER is for saving. It shows what your money could earn. APR (annual percentage rate) is for borrowing. It shows the yearly cost of credit, including interest and any compulsory fees, worked out using a standard method set by FCA rules.
While a higher AER is better for you, you’ll typically want a lower APR, as a higher figure means borrowing costs you more. Read more about APR vs interest rate and how APR works on a credit card.
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