Two savings accounts. Both advertise 5%. One pays you £40 more a year. Here’s why.
Imagine you’re choosing between two savings accounts. Both offer 5% interest. Both look identical on the comparison site. You pick the one with the better app and move on.
You’ve just left £40 on the table.
The difference comes down to a single number that most banks print in small text and most savers scroll past: AER, or Annual Equivalent Rate. Understanding it takes about five minutes. It could be worth hundreds of pounds.
What AER Actually Tells You
Interest isn’t always paid the same way. Some accounts pay it once a year. Others pay monthly. Some digital banks – Monzo, Revolut, and Wise among them – credit interest daily.
That frequency matters more than most people realise, because of compounding. When interest is paid into your account, it immediately starts earning interest itself. The more frequently that happens, the more you earn – even if the headline rate looks identical.
AER solves this by converting every account onto the same scale: what you’d actually earn over a full year, compounding included. It’s the only number that lets you make a fair comparison.
To see the difference in practice, take £10,000 at a 5% nominal rate:
- Paid annually: £500.00
- Paid monthly: £511.62
- Paid daily: £512.67
Same headline rate. £12.67 difference just from payment frequency. Across a larger balance – a house deposit, an inheritance, a year’s savings – that gap grows substantially.
AER vs APR: Don’t Mix Them Up
AER applies to savings. APR – Annual Percentage Rate – applies to borrowing. They sound similar and are frequently confused, but they measure opposite things.
When you’re putting money away, look for AER. When you’re taking out a loan or a credit card, look at APR. Conflating the two is an easy mistake that banks rarely go out of their way to correct.
Why the Rates Differ Between Banks
Not all AER figures are equal, and the gap between them isn’t random.
Traditional high-street banks carry significant overhead – branch networks, legacy IT systems, large workforces. Those costs eat into what they can offer savers. Digital banks, operating almost entirely online, have far lower running costs and can pass more of the return on to customers. That’s a structural advantage, not a temporary promotion.
Competition also plays a role. Challenger banks routinely offer higher AER to attract customers away from established names. If you’ve stuck with the same bank for years out of inertia, there’s a reasonable chance you’re earning less than you could be.
Then there are promotional rates. Some accounts advertise an attractive AER for a fixed period – three months, six months, a year – before dropping to a much lower standard rate. The headline number is technically accurate; it just doesn’t reflect what you’ll earn once the honeymoon period ends. Always check what the rate reverts to, and when.
How to Use AER When Choosing an Account
Don’t compare headline rates. Compare AER figures, side by side, for the same deposit amount and the same term.
Check for any conditions: minimum deposit requirements, restrictions on withdrawals, or introductory periods that expire. A high AER with a catch is often worth less than a slightly lower AER with none.
If you’re putting aside a significant sum, even a 0.5% difference in AER matters. On £50,000, that’s £250 a year – found money, simply from knowing which number to look at.
AER exists precisely because banks don’t all present interest the same way. It levels the playing field. The savers who benefit most from it are the ones who bother to look.
Frequently Asked Questions
Still have questions about AER? Here are some quick answers to the most common ones.
Does AER include tax on interest?
No. AER shows the return before any tax is deducted. The actual amount you receive may be lower if your savings interest is taxable.
Can AER change after I open an account?
Yes. AER can vary over time if the bank changes its interest rate. Promotional rates often revert to a lower standard rate after a set period.
Does AER apply to current accounts or just savings accounts?
AER mainly applies to savings and fixed-term accounts. Most current accounts do not pay interest or use AER, though some high-interest current accounts may advertise it for comparison.
Image was generated using Google’s Nano Banana.
