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What is AER?

AER shows you what interest rate you could earn, over the course of a year, if interest was compounded. This means it might give you a more realistic idea than looking at basic or gross interest rates. It can help you to compare different savings or investment options.

In this guide:

What does AER stand for?

How does AER work?

How is AER different from gross interest rate?

Why does AER matter when choosing a savings account?

Things to consider when choosing a savings account

Where to find AER

What does AER stand for?

AER stands for ‘Annual Equivalent Rate’.

How does AER work?

AER is displayed as a percentage and it shows the total amount of interest you could earn if you left your money in a savings account.

This includes compound interest. It’s the interest on your savings plus the interest from that interest. The compounding frequency can vary by product. If the gross interest rate is 5% and interest is paid monthly, the AER will be higher. That’s because you earn interest on interest.

If interest is paid annually, then the gross rate and AER should be the same, as interest is paid once annually.

AER does not take into account any fees or charges that may apply.

How is AER different from gross interest rate?

AER and gross interest rates are both ways of working out the amount of interest you might earn from a savings account over a year (before tax deductions).

Gross interest is the yearly interest rate you’ll earn on your savings. But it does not include compound interest.

AER shows a more realistic picture of what you could earn over a year.

Always read the product terms carefully to make sure you have a clear understanding of the savings account you’re interested in.

Why does AER matter when choosing a savings account?

AER helps you understand how much interest could be paid each year, no matter how often the interest is paid. The AER will show you the total amount of interest you could earn in a year, including the effect of compounding.

Things to consider when choosing a savings account

A higher AER could mean you’ll earn more interest. But this isn’t the only thing to consider when choosing a savings account.

Access to your money

A fixed rate savings account may have a higher AER than other products. But you may not be able to withdraw from it during the fixed term, or you might have to pay a penalty if you do.

If you think you might need to withdraw from your savings account, an instant access or a limited access savings account is a better choice. It’s worth remembering that if you withdraw money at any point, it will affect your potential interest earnings.

Fixed or variable AER

A variable AER means that the rate could change over time. Interest rates can be influenced by The Bank of England Base Rate or market conditions. This means the AER shown might not reflect the actual interest you earn.

Fixed AER is where the interest rate stays the same for a set amount of time. For example, if your AER was fixed at 5% for 1 year, it wouldn’t change during that time.

Tax on interest

You may be taxed on interest from a savings account if it goes over your Personal Savings Allowance.

Interest on savings held in a cash ISA is not usually taxed. For more information visit our guide to comparing cash ISAs vs savings accounts.

Any reference to tax is based on our understanding of current tax regulations which may change in the future and depend on the customer's individual financial circumstances.

Where to find AER

You can usually find the AER of products listed on:

  • savings product pages
  • account summary boxes
  • account statements

It’s usually highlighted to help you compare how much interest you could earn on different accounts.

In summary

Before opening a new savings account, always check the AER to see the most accurate snapshot of how much interest you might earn.

You should also consider if the account fits your needs by looking at:

  • how easy it is to access your money if you need to
  • how much tax you’ll pay on interest
  • any fees or restrictions
  • deposit limits.

To find our most suitable account for you, compare our savings accounts.

Eligibility criteria and terms and conditions apply.

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