Go paper-free
Amend paper-free preferences for your statements and correspondence.
What is AER?
AER – or Annual Equivalent Rate – can help you to understand how much money you’ll make on your savings account over the course of a year.
AER basics
AER is used to show you what you would earn in interest on savings over the course of a year as a percentage.
When shopping around for a new savings account, AER can help you to compare different saving or investment options.
It’s useful to know that AER:
- Does account for compound interest – that’s interest earned in addition to any interest already paid.
- Does not account for fees and charges associated with accessing or managing your savings.
AER, interest and savings
When you put money aside in savings, your bank may reward you by paying you interest. That’s usually a percentage of any money you’ve held with them for a full calendar year.
This is represented as the AER. The higher the percentage, the more interest you can expect to earn on your savings. AER can apply to a wide range of savings products, including:
The amount and regularity of interest payments will depend on the bank or building society, and the terms of the account you select.
Just as an example, fixed ISAs tend to offer higher AER interest returns, but your money may be locked in for longer. Charges or penalties may apply for withdrawing your savings earlier. On the other hand, an instant access ISA provides more flexibility, but lower AER interest returns.
Investments can also be subject to other factors, such as business performance and fluctuations in the stock market, making the potential returns less predictable.
Benefit from tax-free savings by using your yearly Personal Savings Allowance of up to £1,000, and saving up to £20,000 using your yearly ISA Allowance.
However you choose to save, it’s important to consider:
- How much tax you might have to pay on any gains.
- Whether you need regular access to your savings pot.
- Whether you can afford to lock your savings in to earn a higher AER.
- How much risk you’re prepared to accept in the hopes of earning at a higher interest rate.
It’s worth comparing several options to find one that suits your needs best, which is where the AER comes in handy. Whatever you choose, you usually don’t have to do much more than hold your money in a savings account to start earning interest.
Understanding the value of an AER
Calculating AER can get a little complicated, as it’s influenced by several factors:
- The total (gross) interest earned over a year.
- Accounting for the effect of compound interest.
- How often interest is paid – it could be monthly, bi-annually, annually etc.
You’ll see AER displayed as a percentage – 1.5%, for example. By depositing and holding £100 with a bank offering 1.5% AER, after a year you’d receive £1.50.
Just as an example, let’s say you’re able to deposit and hold £2,000 in a savings account offering 2% AER. Accounting for compound interest, your earnings over a 5-year period could look like:
|
Year |
Interest |
Total interest |
Balance |
|---|---|---|---|
|
Year 1 |
Interest £40 |
Total interest £40 |
Balance £2,040 |
|
Year 2 |
Interest £40.80 |
Total interest £80.80 |
Balance £2,080.80 |
|
Year 3 |
Interest £41.61 |
Total interest £122.41 |
Balance £2,122.41 |
|
Year 4 |
Interest £42.44 |
Total interest £164.85 |
Balance £2,164.85 |
|
Year 5 |
Interest £43.29 |
Total interest £208.16 |
Balance £2,208.16 |
You can see that any interest paid becomes part of your balance, and you start earning interest on the total. Over time, compound interest can help your savings to grow faster.
Advantages and drawbacks of AER
Because it includes the effect of compound interest, AER gives you a realistic view of the interest you could earn. However, there are other factors you should bear in mind:
AER does
- Give you a realistic impression about your potential returns on savings.
- Help you to compare savings or investment options.
AER does not
- Account for any fees or charges related to accessing or managing your savings.
- Feature alongside all investment products, so investors need to make their own calculations.
What is the difference between AER and gross interest?
AER and gross interest both look at the amount of money you can earn on your savings, but not in exactly the same way.
We've already described how AER accounts for compound interest. The gross interest rate does not. As such, AER is a more accurate way to estimate the potential return on your savings.
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 greater the difference will be between the AER and the gross rate.
Learn more about savings interest rates
AER and APR – what’s the difference?
When looking at financial products, you might see AER or APR next to an interest rate. Although they’re both shown as a percentage, they represent very different things:
- APR (Annual Percentage Rate) is used for loans, mortgages and other forms of borrowing. It indicates the percentage of interest you’ll need to pay each year when you borrow money.
- AER (Annual Equivalent Rate) is used for savings and investment accounts. It indicates the percentage of interest you’ll receive each year for holding savings with your bank.
Why save with Lloyds Bank?
Important legal information
Lloyds and Lloyds Bank are trading names of Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065. Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278.
Eligible deposits with us are protected by the Financial Services Compensation Scheme (FSCS). We are covered by the Financial Ombudsman Service (FOS).