Annual Equivalent Rate (AER)

The amount you will be given for any money held in a savings account is presented to you as a percentage Annual Equivalent Rate (%AER).

The AER is given to demonstrate what your interest return would be if the interest was compounded and paid annually instead of any other period (e.g. monthly).

Advertisements for interest-bearing savings accounts will quote the AER so that you can use it as a means for comparing accounts. This way you will be able to see which account will give you the best return.

If, for example, an account pays interest monthly, then the AER is calculated by adding each interest payment to the deposit and then calculating the next interest payment from the newly calculated deposit figure. This is called compounding the interest.

This means that accounts that earn interest quarterly will have a slightly higher AER than the gross rate because the AER will include the compounded interest over the three months within the quarter.

The gross AER is the contractual rate of interest that you will be paid before income tax has been deducted. The net AER is the amount of interest you will receive after allowing for the deduction of tax.