What is the Annual Equivalent Rate (AER): how to calculate it?

When you’re shopping around for savings accounts, you’re likely to come across the term Annual Equivalent Rate (AER).

But what is AER exactly, and how does it affect how much you could earn from your savings?

Read on to find out everything you need to know about the Annual Equivalent Rate here in the UK, including how to calculate AER.

And if you’re interested in earning more from the money you hold, have a look at Wise Interest. By investing in an interest earning fund, you could earn a 4.70% variable rate* on your GBP balance held in your Wise account.

Learn more about the Wise Interest

Capital at risk. Current rates do not guarantee future growth. *Variable rate is based on 7 day performance as of 10 Aug 2023. This fund has returned an 0.93% annual average over the last 5 years, excluding Wise and fund manager fees. See full 5 year past performance of funds. Not available in the US.

What is the Annual Equivalent Rate (AER)?

The Annual Equivalent Rate is a type of interest rate for savings accounts and Individual Savings Accounts (ISAs). Displayed as a percentage, it is used to show how much interest you could earn on a particular account over the course of a year.

The AER is very helpful for comparing savings accounts, as it lets you see how much you could get in interest over 12 months. Some savings accounts run for different terms (e.g. 18 months or 2 years), but AER lets you compare them like-for-like over the same time period.

The higher the AER, the more you’ll earn in interest.

What does AER variable mean?

When you see AER on a savings account or ISA, it’ll often be followed by the word ‘variable’. This means that the amount of interest you’ll earn could go up or down, if the interest rate on the account changes.

If you have a fixed rate savings account, this shouldn’t happen - so you can calculate AER without worrying about the provider changing the interest rate.

📚 Read more: What is an Individual Savings Account (ISA)?

How is AER calculated?

AER is calculated using a complicated formula, which takes factors such as compound interest into account.

But here’s a quick example. Let’s say you open a savings account offering 1.5% AER. If you deposit and hold £500, you’ll have £7.50 in interest at the end of the year.

The difference between AER, APR, and gross interest

You may see other terms used in relation to interest rates, other than AER. The most common are Annual Percentage Rate (APR) and gross interest.

The main difference between APR and AER is that the former is used when you borrow money, such as taking out a credit card. It offers an indication of what interest rate you’ll pay when you borrow money. AER is used for savings, when you’ll be earning interest.

So what’s the difference between AER and gross interest? This other term does actually refer to interest on savings accounts, just like AER. However, gross interest doesn’t take into account compound interest, so AER is usually more accurate.

Wise – Money for here, there and everywhere

Open a Wise account online and you can manage your money in multiple currencies all in one place.

You can even make fast, secure international transfers for tiny fees and the mid-market exchange rate. There’s even a Wise card for spending abroad (or in the UK).

What’s more, as a UK resident, you can also earn a return by investing in an interest earning fund with the Wise Interest feature on your GBP balance. At the same time, you’ll have full access to your money whenever and wherever you need it. Just note, investments, even in a low-risk fund are never guaranteed.

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Capital at risk. Please see the Terms of Use for your region or visit Wise fees & pricing for the most up-to-date information on pricing and fees.

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And that’s it - your crash course in Annual Equivalent Rate (AER) and what it all means. After reading this, you should be better equipped to compare savings accounts and ISAs, and find the highest-paying account for you.