What is AER? | Meaning and definition of AER | YBS
Reading time 4 minutes
At a glance:
AER stands for Annual Equivalent Rate.
It’s the interest rate that’s most often used to compare savings accounts.
It can show you what you can earn over a year.
AER is shown as a percentage. It can help to:
Understand the amount of interest you can earn each year.
Compare options, like savings accounts, bonds, and ISAs.
While AER may be useful, it’s not the only thing to think about when picking a savings option.
Is AER important?
While AER can make quick comparisons, there are other factors to consider when comparing savings accounts:
If you need regular access to your money. Accounts with a fixed rate might have limits on how often you can withdraw money.
How much tax you might have to pay. If the interest you earn might go over your personal savings allowance, you may consider an ISA.
This is why you will need to look at all the features of a savings option, rather than going for the highest AER.
AER example
For example, if you saved £1000 with an AER of 4%, after a full year you would have earned £40 in interest.
If you left the original amount, plus the £40 compound interest, for another year, you would receive a further £1.60 in interest if the same terms applied for the account.
If you left the original amount, plus the £40 compound interest, for another year, you would receive a further £1.60 in interest if the same terms applied for the account.
What is compound interest?
Compound interest is when you earn interest on the money you have saved plus the interest that you’ve already earned.
Not all savings accounts offer compound interest, so be sure to check.
Not all savings accounts offer compound interest, so be sure to check.
What is the difference between AER and gross interest?
AER accounts for compound interest, gross interest does not. This means that AER tends to be a more accurate way to estimate how much you can return on your savings.
Pros and Cons of AER
Benefits of AER
AER helps you compare investment or saving options
It can give you a more accurate impression about your potential savings or returns, as it includes compound interest.
Considerations
AER doesn’t account for charges or fees that may be related to managing or accessing your money
It isn’t a feature with all investments or accounts, so you can’t always use it
There might be other factors, like tax or access, you need to think about
The content on this page is for reference. It is not financial advice.
For help with money issues, try MoneyHelper.
For help with money issues, try MoneyHelper.
