Help with Gross v's AER interest rates

solorize

Hi,

I currently have an ISA: Defined Access E-ISA Issue 2, with Virgin Money and had a look at what the interest rate was, which it states is 1.5% Gross.

They now have a new product called Defined Access E-ISA Issue 6,
which states that the interest rate is 1.31% AER.

But I am not sure how to work out GROSS to AER so am unsure
if the new ISSUE 6 E-ISA gives me a better interest rate than
the one I am currently on.

Also does Gross AER = Net rate?

Any help would be appreciated.

Mark

eskbanker

AER is the harmonised measure of total return over a year, so if interest is paid annually then gross = AER, but if it's paid monthly then AER will be slightly higher than gross as it will take into account compounding.

Net is the same as gross for an ISA, and in the new PSA world all other savings accounts too!

So, unsurprisingly, issue 6 is worse than issue 2....

Vortigern

If interest is credited to the account annually, the gross rate is the same as the AER.

If interest is credited monthly, the AER will be a little higher than the gross rate, because the AER includes interest on the previous months' interest.

No tax is deducted from ISAs (or any bank account these days), so the net rate is irrelevant.

solorize

Thank you both for your replies, much appreciated.

I've checked my E-ISA and the interest is paid Monthly.
But the Interest Rate is stated as 1.50% Gross shown
at the top of my account.

There was a little '1' at the end of the word Gross. Which when I looked down, right at the bottom of the statement page the '1' related to the following information:

1 Interest rate not what you expected?
Gross P.A. is the rate of interest paid without the deduction of tax. Please note that the automatic deduction of tax on savings interest for non-ISAs ceased with effect from 6 April 2016.

For ISAs the tax-free rate is the contractual rate of interest payable where interest is exempt from income tax. The interest rate shown is based on cleared balances only. If you have any uncleared funds this rate may change.

Does this change anything to what we have been discussing? and does this still mean that the 'Issue 2' ISA is better than the new 'Issue 6'.

eskbanker

solorize wrote: »

Does this change anything to what we have been discussing? and does this still mean that the 'Issue 2' ISA is better than the new 'Issue 6'.

No and yes respectively!

CLAPTON

keep it simple :
1.5% is greater than 1.31%

PeacefulWaters

1.50% gross per year, paid monthly, should have an AER of 1.51%.

Which is bigger than 1.31%.

solorize

@PeacefulWaters
Out of interest how did you calculate Gross to AER, is there
an online calculator somewhere?

LXdaddy

solorize wrote: »

@PeacefulWaters
Out of interest how did you calculate Gross to AER, is there
an online calculator somewhere?

When interest is paid monthly then
AER% = (1 + Gross%/12) ^ 12 gives a close approximation


so that is one twelfth of the interest applied each month compounded 12 times


1.5% / 12 = 0.125% = 0.00125


So a 1 pound balance at the start of month 1 becomes 1.00125 at the start of month two that is then multiplied by 1.00125 at the end of month 2 and so on


1.00125 ^ 12 = 1.0151033556 according to my calculator (^ is "to the power of" ie 12 of 1.00125 multiplied together)


1.0151 = 101.51% ie 1.51% interest

solorize

@LXdaddy

Thanks for the explanation, looks like I need to polish up
on my rusty maths skills.