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What is AER?
AER, or Annual Equivalent Rate, is used to show you what you could earn from a savings account over a year.
AER makes it easier to compare savings accounts that might have differences between them. It's a bit like how APR works for borrowing products, like credit cards and loans.
What exactly is AER?
Displayed as a percentage, the AER can help you to:
- Compare saving options, including savings accounts, ISAs, bonds and investments.
- Understand the amount of interest you could earn over a year.
It's worked out using a complicated formula that takes compound interest into effect. In simple terms, it accounts for any interest you earn on top of interest you’ve already been paid.
However, AER doesn’t account for fees and charges for managing or accessing your savings.
AER in action
As an example, if you deposit and hold £500 with a bank offering 1.5% AER and an annual compound rate, after a full year you’d receive £7.50 in interest.
Hold that balance of £507.50 for another year and, assuming the same terms apply, you’d receive a further £7.61 in interest.
The higher the AER paid and compounded, the more interest you could earn. But, if you withdraw money at any point, it will affect your potential interest earnings.
It’s not all about the AER
While the best AER might be appealing, also consider:
- How much tax you might pay on any gains.
- Whether you need regular access to your money, or can afford to lock it in.
You can benefit from tax-free savings by using:
- Your annual Personal Savings Allowance of up to £1,000
- Your annual ISA Allowance of up to £20,000
Fixed ISAs might offer a higher AER, but your savings could be tied in for longer and fees could apply if you withdraw money early. Easy access ISAs offer more flexibility, but a lower AER.
The AER is helpful for making quick comparisons, but make sure the savings option you select meets your individual needs.
What’s the difference between AER and gross interest?
AER and gross interest are both used to represent the interest you could earn on your savings, but they’re not the same thing.
AER accounts for compound interest, while the gross interest rate doesn’t. So, it’s likely that AER offers a more accurate estimate.
If interest is paid and compounded more than once each year, the AER will be higher than the gross interest rate. The more regularly this happens, the bigger the difference will be between the AER and gross rate.
What's the difference between AER and APR?
While AER is used to calculate interest earned when you save money, APR gives you an indication of what you’ll pay when you borrow money. Both can be used to compare similar accounts.
APR stands for Annual Percentage Rate.
Why save with Halifax?
Halifax Savers Prize Draw
Every month, eligible Halifax savers have the chance to win prizes of up to £100,000. Registration and prize draw rules apply.
Halifax is a division of Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628.
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