Savings - AER

MoneyPenny_2

Dear All,

I have a question and I think this is probabily the best place to ask it.

"How is the AER percentage rate calculted for a savings account?"

*Sometimes the AER quoted is the same as the Gross rate for an account, then sometimes it's more-which means that the gross rate is less than you thought you were getting. Even in this web-site AERs for some products are compared with Gross rates for others which might mean that the comparisons are misleading.

I've asked staff in a number of building societies for the calculation of their AER and why it is more than the gross rate and I've never received a straight answer; which probabily means that they don't understand it either. So, I reckon this is the place to find some one who does!

Yours,
MP.

Stompa

Does this help?

http://www.fool.co.uk/news/comment/2004/c040701e.htm

grumbler

AER vs Gross interest :eek:

MoneyPenny_2

Thanks to the both of you for this.

I understand a lot of the information, but there's a lot I still don't understand. It features around differing Gross rates and AER being quoted for accounts where there are no bonuses and the interest is paid annually.

I have a question:

If I invest £100 for a year at a fixed rate of interest will the interest be the Gross rate or the AER? If it's the AER what is the point of the Gross rate?

MoneyPenny_2

Can anyone answer the previous question?

Hereward

MoneyPenny wrote:

If I invest £100 for a year at a fixed rate of interest will the interest be the Gross rate or the AER? If it's the AER what is the point of the Gross rate?

Assuming that the interest is paid annually there should be no difference between the AER and gross rate. The interest you receive will be subject to tax (unless you are registered as a non-taxpayer), so the actual amount will be AER - 20% (8 tenths of the AER).

HTH

coal32

to your first post - An AER can be more or less than the Gross rate depending on the frequency of interest payments and few other factors. In most cases the AER is more when interest is paid monthly.

last post - £100 for 1 at a year fixed rate paid annually should have the same Gross and AER.If the interest is paid say monthly then apply the gross rate to each month -add them all up and it should equal the AER. Can you give actual example of where you're seeing different Gross and AER under the terms you've given?

The only possible way i can think of where aer and gross are different when interest is paid annually is where investment is over a number of years and interest is only paid on invested amount in which case the AER will be lower.

3) Even if Gross and AER are the same you may still want to know Gross for Tax reasons.

Bottom line - Use AER for comparisons. Remember when interest is paid monthly the Gross p.a amount is not the annual amount but what is added each month.

Limes

MoneyPenny wrote:

I understand a lot of the information, but there's a lot I still don't understand. It features around differing Gross rates and AER being quoted for accounts where there are no bonuses and the interest is paid annually.

Do you have a specific account/example in mind? It would be a bit strange to find an account that paid interest annually, had no intro bonuses and had a differing AER and Gross rate, unless there was something strange happening with the frequency at which interest was calculated. . . but would have to take a look at a specific example to determine why.

MoneyPenny_2

Thanks to all of you for this useful information.

One example I was thinking of is the ICICIC HiSave account. This is described as having an AER of 5.15%, which they say is equivalent to a Gross rate of 5.05%. There is no bonus and as far as I can ascertain the interest is paid annually.

Mr_Mumble

ICICI pays monthly (gross 5.03%, AER 5.15%). If an account has interest paid yearly with no strings or bonuses attached then gross rate will be the same as AER.

Robert_Sterling

This all makes a nice change from discussing APRs