In this article
Annual Equivalent Rate (AER) shows how much your savings could grow over a year. It reflects not only the interest rate but also how often interest is paid and compounded, providing a more accurate view of the return on your money.
In this guide, we’ll explain what AER means, how it affects savings interest rates and why it matters when comparing savings accounts. We’ll also explain how AER is calculated and how it applies to savings accounts.
What does AER mean?
AER stands for Annual Equivalent Rate. It’s a standardised way to show how much interest your savings could earn over a year. It takes into account how often interest is paid, allowing you to compare accounts fairly and understand potential growth, without needing to calculate the effects of compounding yourself.
How does AER work?
AER shows the annual return on your savings by factoring in how often interest is added to your account – daily, monthly or yearly. The more frequently interest is paid, the more it compounds, meaning you earn interest on both your original deposit and the interest already added. This demonstrates how your savings can grow over time.
Why is AER important?
AER shows the total interest your savings could earn over a year, not just the advertised interest rate. By including compounding, it gives a more accurate picture of the annual return.
This makes it easier to compare savings accounts fairly. Two accounts might advertise similar rates, but if interest is paid at different intervals, the returns can vary. AER standardises these differences, helping you see which account could grow your money the most over time.
How is AER calculated?
AER is calculated by considering both the interest rate and how often it is paid on a savings account. The key difference from an introductory or nominal rate is compounding, where interest is added to your balance and future interest is then calculated on this higher amount.
Here’s a simple example to show how interest can build up over time:
| Month | Balance at start | Interest added | Balance at end |
|---|---|---|---|
| 1 | £1,000 | £4.07 | £1,004.07 |
| 2 | £1,004.07 | £4.18 | £1,008.25 |
| 3 | £1,008.25 | £4.20 | £1,012.45 |
| 4 | £1,012.45 | £4.22 | £1,016.67 |
| 5 | £1,016.67 | £4.24 | £1,020.91 |
| 6 | £1,020.91 | £4.25 | £1,025.16 |
Pros and cons of AER
Pros
- AER provides a standard method for comparing savings accounts across different providers.
- It accounts for interest on both your initial deposit and the interest already earned, showing the accurate yearly return.
- Makes it easier to estimate how much your savings could grow over time.
Cons
- AER calculations assume the interest rate remains constant for a whole year, which may not accurately reflect variable rates.
- Taking money out or only keeping it in for part of the year can reduce actual earnings.
What is the difference between AER and gross interest?
Gross interest shows the introductory interest rate on your savings before compounding. It tells you the rate the bank pays on your deposit, but it doesn’t reflect how often interest is added to your balance.
On the other hand, AER includes compounding and shows the total interest you would earn over a full year. This makes AER a more precise way to compare savings accounts, as it reflects the actual annual return you can expect.
AER vs APR: What’s the difference?
AER and Annual Percentage Rate (APR) are similar in that both indicate the effect of interest over a year, but they apply in very different situations.
AER relates to savings and shows how much interest your money can earn over a year, including compounding. It helps you compare accounts fairly and understand the potential growth of your funds.
APR applies to loans and other types of borrowing. It provides a complete picture of what you would pay over the life of the loan.
How could The AA help?
We offer savings accounts with easy access so you can take out your money whenever you need it. You can open an AA savings account if you:
- Are aged 18 or over
- Are a UK resident with a UK address
- Have UK tax residency only
- Have an open UK personal account that can be used as a nominated account
Interested in learning about what The AA could offer? Find out more about our savings accounts, and explore our finance guides.
FAQs
Can AER change over time?
Yes. AER reflects the interest rate offered by a savings account, and if the bank changes that rate, the AER will change too. Always check whether an account has a fixed or variable rate before committing.
What is a variable AER?
A variable AER means the interest rate can go up or down over time. While it may increase your earnings if rates rise, it can also reduce them if rates fall.
What is a good AER rate?
A “good” AER depends on the current market and your savings goals. Generally, higher AERs mean better returns, but it’s also important to consider account features, access to your money and whether the interest rate is fixed or variable.
How can I use AER to compare savings accounts?
AER provides a standardised way to see what each account would earn over a year, including compounding. By comparing AERs, you can identify which accounts offer the best potential growth without getting confused by how often interest is paid.
Is AER calculated before or after tax?
AER is calculated before tax, so the actual amount you receive may be lower if your interest is taxable. Keep this in mind when estimating how much your savings will grow.