Best Savings Rates
Advice, help, information and guidance on savings, interest rates, and savings tax advice.

Compare Best Savings Rates - Annual Equivalent Rate (AER)

best savings ratesOK - we've looked at simple interest and the power of compound interest, but in order to compare the best savings rates available, you will need to compare one offer with another. In order to do this we use a standard rate which is called the AER or annual equivalent rate. This is the official rate for savings accounts and is used as it takes into account the effect of compounding that we looked at on the last page. It allows us to make simple and quick comparisons between one lender and another, so you need to understand how it works, and what the numbers mean. Sadly many savers do not - so please read the following page carefully!

Best Savings Interest Rates - AER Explained

In simple terms the AER rate shows you what your savings will earn in a year if left for twelve months, and assuming interest is paid annually.

AER (annual equivalent rate, although sometimes known as the annual effective rate) is the interest rate usually quoted for savings accounts. It explains what rate of interest you will earn depending on how often interest is added to your account. For example, an account that accumulates interest monthly will have a lower interest rate than one that pays annually because the monthly account will benefit from compound interest more quickly. However, they might both have the same AER.

In this way, AER allows comparison between savings accounts that pay interest at different intervals. AER doesn't include costs and charges simply because there generally aren't any associated with savings accounts.

Because of this lack of fees, savings accounts often quote their interest rate as APR which stands for Annual Percentage Rate. For example, a savings account that pays 5% interest a year also has an APR of 5% - this is the interest rate plus any fees/charges (none) that need to be included. It also has an AER of 5%, because interest is paid annually. So please be aware that you may see both!

Savings Rates - AER Tricks!

Yes, surprise, surprise, the providers of savings accounts play all sorts of tricks in order to get their particular product to the top of the list with the best savings rates. The most common way they do this is with an introductory bonus. Bonuses are one of the most common ways of distorting the best-buy tables. This is where a higher, introductory rate is offered for a limited period, for instance six months, after which the account reverts to a lower rate. So, for instance, the actual return over one year for an account with a six-month introductory rate will be the quoted AER, but if you hold the account for more than one year, the real average rate will be much lower than the AER. In other words the AER has been distorted by the effect of the initial bonus.

Now if you plan to move your money regularly and simply take advantage of the initial offer, then this is fine - unfortunately many savers are simply not that aware, merely looking at the AER quoted at face value - so please read the small print, and if you're not sure then ask the lender to quote the AER rate, in year two! There are other tricks they use, but this is the most common so you have been warned. Remember, to get the best savings rates make sure you read the small print! If the lender is offering a bonus just to get to top of the ranking, then by all means take advantage, but make sure you move your money when the offer ends.

Another trick used, although not directly related to AER quoted rates is that of offering a headline grabbing rate and then limit what you can save, or insist you open a current account too - so be careful.

Saving Rates - Gross Rate

Banks and financial institutions normally quote one of two different interest rates on their savings accounts, the gross rate and the AER. The gross rate is the flat rate of interest that’s actually paid. As we have seen the AER includes interest on the interest ( compound), which shows what you would get over a year if you put your money into the account and left it there.

If interest is paid annually the gross rate and AER should be the same, as there’s no interest compounding. When interest is paid monthly, the gross rate given is usually around 0.1% less than the AER rate.

Now remember, that on most savings accounts you will have to pay tax on any interest so let's look at the options for tax free savings, and the best savings rates available.

Best Savings Rates - next page