Annual Equivalent Rate

What is an Annual Equivalent Rate (AER)?

An Annual Equivalent Rate (AER) is the amount of interest you will earn from investing savings, presented to make it easier to compare savings accounts so you can see what your investment should look like after a year if left untouched. Unlike APR , it has no basis in law.

Any interest rate quoted as an Annual Equivalent Rate will only be applicable if you do not withdraw money from your account during the year in question as it illustrates what the interest would be if it was paid and compounded (added to the interest from previous payouts). As such, any withdrawals that you make from the account can affect the rate you will receive at the end of the year.

The AER quoted is often the gross figure – meaning the amount calculated before interest is deducted. By law lenders have to collect tax on the interest earned – known as withholding interest – so the actual amount you receive will be the AER minus the basic rate of taxation. For Higher Rate tax payers, the tax may have to be paid directly.

Banks often have the ability to vary interest rates without notice, so unless the Annual Equivalent Rate is quoted as being fixed for a specified period, the amount you receive may differ, either more or less, depending on how rates have moved.

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