AER vs Gross 26 June 2013 at 9:09PM in ISAs & tax-free savings 7 replies 966 views

JenIttels

I have a 12/13 ISA with nationwide (Online ISA Iss. 4) that has an AER of 1.88% (with a bonus) until Oct 13. It also says it has a gross rate of 3.1%.

I was thinking about applying for a new Nationwide ISA (Web ISA Iss. 3) which says it has an AER of 2.25% (again with a fixed bonus) but it's gross rate (p.a.) is then only 2.25%.

So I admit I really can't wrap my head around the AER vs gross rates info so I have no idea which one to pay into for the current (13/14) tax year. I'm probably only going to be able to put in about 1k this tax year (and I think I could do that next month and then not pay into it anymore).

Could someone who understands money maths help me figure out where to put my money? Please? I'm a bit confused that 12/13 has the higher gross but lower AER and that the 13/14 has a higher AER but lower gross. And how much will the cut in bonus affect me on the old one? Thanks SO much.

Notes: I've looked at Martin's best buys and actually this new NW ISA is the best choice for me. I have 10k + in the old ISA for transferring.

Lokolo

Those rates you've quoted don't make sense.

You wouldn't have a gross rate of 3.1% with an AER of 1.88%.

But for ISAs, assuming interest is paid yearly, then the AER will match the gross. And for easy comparison between 2 ISA accounts, using the AER is fine.

But as I said at first, the rates you've quoted aren't correct.

edit - OK i've seen where you are looking, but that still doesn't make any sense. I assume they're screwing around with the bonus being included in some rates and not others.

edit 2 - Yes they are

http://www.nationwide.co.uk/NR/rdonlyres/17C602DF-6885-42C0-B1BF-01DBDFC8903C/0/P1915April2012.pdf

go to Page 8 and it shows, but their gross seems very wrong to me.

JenIttels

Lokolo,

Thanks so much for checking for me. I did wonder if it was a mistake but as I say, I'm so confused about what the rates really mean anyway that I assumed that it was me not understanding something else!

I'm going to go ahead and get the new ISA rolling.

Really appreciate your time.

Edited to say: looking through that document makes me think that the 3.1% means something to them other than gross. Not sure what exactly...

opinions4u

Where a bonus rate lasts less than 12 months the AER has to reflect this, to give the customer an indication of the effective rate over 12 months.

For example:

3% gross rate (1% basic plus 2% bonus for a year) is a 3% AER assuming interest is paid annually.

3% gross rate (1% basic plus 2% bonus for 6 months) is a 2% AER.

3% gross rate (1% basic plus 2% bonus for 3 months) is a 1.5% AER.

Your contractual rate of interest is the gross rate. Not the AER. So if you are currently earning 3.1% gross until a particular date keep it until that date arrives.

Lokolo wrote: »

You wouldn't have a gross rate of 3.1% with an AER of 1.88%.

If the bonus has less than a year left it is more than possible.

psychic_teabag

Just to muddy things slightly, there's a risk that rates could continue to fall. In that case there's something to be said for opening an account with the minimum while it's available, just to bag the current rate. Unfortunately, the rules mean you can't put a little bit of new money into the 2% account, but the rest into the existing account - all this year's subscriptions must stay together. You could achieve it with a partial transfer from the old money - just depends on how complicated you want to make things...

(The extra 1% on £1000 for 4 months would be £3.33. If you just put the new money into the 2% account now, you could look on that as an insurance premium should rates fall between now and October.)

This is all assuming the 2% account allows transfers - I've not checked that... There are other providers who would pay around the same and do allow transfers.

EDIT: sorry, it has a min opening balance of £1000, so you can't just open it with a nominal amount for now... It has a min operating balance of £1 - you could cheat and open it with £1000 from somewhere and immediately withdraw £999. This does waste part of your annual allowance, but it sounds like you wouldn't be using it all anyway... I suspect I'm not really helping, so you should perhaps ignore my ramblings...

JenIttels

opinions4u wrote: »

Where a bonus rate lasts less than 12 months the AER has to reflect this, to give the customer an indication of the effective rate over 12 months.

For example:

3% gross rate (1% basic plus 2% bonus for a year) is a 3% AER assuming interest is paid annually.

3% gross rate (1% basic plus 2% bonus for 6 months) is a 2% AER.

3% gross rate (1% basic plus 2% bonus for 3 months) is a 1.5% AER.

Your contractual rate of interest is the gross rate. Not the AER. So if you are currently earning 3.1% gross until a particular date keep it until that date arrives.


If the bonus has less than a year left it is more than possible.

Thanks for your reply. Sadly the money has already been transferred out of the old ISA so I'm going to take a hit on interest. Sigh.

badger09

psychic_teabag wrote: »

Just to muddy things slightly, there's a risk that rates could continue to fall. In that case there's something to be said for opening an account with the minimum while it's available, just to bag the current rate. Unfortunately, the rules mean you can't put a little bit of new money into the 2% account, but the rest into the existing account - all this year's subscriptions must stay together. You could achieve it with a partial transfer from the old money - just depends on how complicated you want to make things...

Probably not much help to OP now, but Nationwide is in fact one of very few institutions which allows you to split your current year's ISA subscriptions between its various ISA products.

thenudeone

Newcastle BS is another
https://www.newcastle.co.uk/maximISA