Difference between AER, Gross and Net interest

fimonkey

Can someone explain these to me please? For instance, in the best buy savings accounts, A&L pay AER 6.1%, but their NET is only 4.64% for a BR taxpayer, whereas Sainsbury's pay 6%AER but their net is higher at 4.8%.

In terms of savings and return, it's NET I should be bothered with right?

If so, which is the best savings account on the market currently?

Cheers

CLAPTON

gross refers to the the rate that determines the daily interest calculation. AER also takes into account when that interest is added to the capital

so if the interest is added once a year the AER is the Same as Gross.

if interest is added to the capital more than once a year e.g. once a month then the AER is higher than gross as you get more interest, as the monthly interest also earns interest.

Calculated is as follows (for montly interest a/c)
AER = (1+gross/12)power12 - 1

so e.g if gross is 5.95% then AER is 6.11% and net is simply 5.95%x 0.8 = 4.76%

i.e. Net is 80% of the gross

the best figure is compare products is the AER

fimonkey

Thank you.... one more question if I may, regardles of when interest is paid (annually or monthly) is it ALWAYS calculated on a daily basis?

masonic

I've never come across an account that doesn't calculate interest daily.

CLAPTON

as far as i know all systems calculate on a daily basis (i can't see how they can do otherwise) although some start counting at slightly different times like e.g. the day after the (cleared) deposit and have slightly differenct rules when you withdraw.

Milarky

CLAPTON wrote: »

e.g if gross is 5.95% then AER is 6.11% and net is simply 5.95%x 0.8 = 4.76%

i.e. Net is 80% of the gross

the best figure is compare products is the AER

Surely '4.76%' itself is less than the 'annual (net) equivalent interest' then? Even the net interest gets compounded.

i.e. [ 1 + (0.00595/12) ]^12 = 5.966% x 0.8 = 4.773%?

A tiny difference, admittedly.

In theory interest can be compounded in 'continuous time'. Use the natural logarithm 'e' (=2.71828.....) as the base and raise to the power given by the simple interest rate

For instance, assume a 4% gross rate

Paid twice a year it becomes 1.02 x 1.02 = 1.404 = 4.04 AER

Paid four times a year it becomes 1.01 x 1.01 x 1.01 x 1.01 = 1.0406 = 4.06 AER

12 times a year: (1 + [0.04/12] ) ^ 12 = 1.0407415 = 4.07 AER

365 times a year: ( 1 + [0.04/365] ) ^ 365 = 1.0408084 = 4.08 AER

And 'infinitely many times' a year: 2.71828..^0.04 = 1.040810774

So banks could calculate easily interest in continuous time if they wished to but it makes practically no difference on monthly sums even.

eg:

£500 is deposited at index .001.00.00.00 ('midnight 1st Jan') in the year

£500 is deposited at index .182.12.00.00 ('midday 2nd July') also

That would give

e^0.04 on the first amount and e^0.04x0.5 or e^0.02 on the second (both equal amounts)

£500 x 2.71828..^0.04 = £500 x 1.40810774 = £520.405

£500 x 2.71828..^0.02 = £500 x 1.20200134 = £510.100

So the gross interest is worked out at £20.41 + £10.10 = £30.51

Compare that with the 'simple' interest calculation of £30 - not a lot in it

CLAPTON

I was giving the definitions used by the banks.. net interest rate is Gross x 0.8 as a definition.

Obviously if you allowed the net interest to compound then and the account was say monthly paid then the actual
interest received will be very close to
AER x 0.8 and not the Gross x 0.8.

interesting observation about infinite number of compounding.. i'll have a look when the brain is a little clearer

IGK

fimonkey wrote: »

Can someone explain these to me please? For instance, in the best buy savings accounts, A&L pay AER 6.1%, but their NET is only 4.64% for a BR taxpayer, whereas Sainsbury's pay 6%AER but their net is higher at 4.8%.

In terms of savings and return, it's NET I should be bothered with right?

If so, which is the best savings account on the market currently?

Cheers

OK to be completely accurate the NET should be the AER * 0.8. That's the actual interest your account will be credited with. So for £10,000 earning 6.1% the interest earned and actually credited to the account will be £488 (£610*0.8 or 4.88%)

Saying that, I couldn't find anywhere that shows the 4.64% NET figure for A&L - are you sure that's right?
The Sainsbury's NET is correct - 6% AER * 0.8 = 4.8%

However, perhaps more importantly, if you are comparing the A&L DirectSaver with the Sainsbury's Internet Saver, you should be aware that with A&L there is a penalty of one month's loss of interest for any month in which you make a withdrawal. Sainsbury's doesn't have that penalty.
That would make a big difference to the interest if you do make any withdrawals. To me it's a bit of a cheeky gimmick that allows them to publish headline-grabbing AER rates whilst potentially paying you much less...

fimonkey

Sorry IGK, I was on moneysupermaket.com and have misquoted. Net for A&L is 4.76% compared with net of 4.7 for sainsbury's. I was confused by the fact A&L had higher Gross but lower net and wondered what the true figure in pounds would meant to me for 30K, br taxpayer.
I see the clause in A&L, but for me it's a perk in that it'll mean I don;t dip nito the money for a little treat now and again.

Milkarky... completely beyond me! But thanks anyway.

greenface

i was just about to say what milarky but i thought it was obvious :rotfl:

and i am a number missing from my computer the one between 6 and 8 so wouldnt help much

Pssst

IGK wrote: »

OK to be completely accurate the NET should be the AER * 0.8. That's the actual interest your account will be credited with. So for £10,000 earning 6.1% the interest earned and actually credited to the account will be £488 (£610*0.8 or 4.88%)

Saying that, I couldn't find anywhere that shows the 4.64% NET figure for A&L - are you sure that's right?
The Sainsbury's NET is correct - 6% AER * 0.8 = 4.8%

However, perhaps more importantly, if you are comparing the A&L DirectSaver with the Sainsbury's Internet Saver, you should be aware that with A&L there is a penalty of one month's loss of interest for any month in which you make a withdrawal. Sainsbury's doesn't have that penalty.
That would make a big difference to the interest if you do make any withdrawals. To me it's a bit of a cheeky gimmick that allows them to publish headline-grabbing AER rates whilst potentially paying you much less...

Indeed though i notice that in the application process for A&L E saver,you can opt to have interest paid monthly into your linked account which would not count as a withdrawl leading to a loss of a months interest.