AER vs Gross

edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
7 replies 965 views
JenIttelsJenIttels Forumite
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edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
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.

Replies

  • edited 26 June 2013 at 9:25PM
    LokoloLokolo Forumite
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    edited 26 June 2013 at 9:25PM
    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.
  • edited 26 June 2013 at 9:40PM
    JenIttelsJenIttels Forumite
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    edited 26 June 2013 at 9:40PM
    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...
  • edited 26 June 2013 at 10:19PM
    opinions4uopinions4u
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    edited 26 June 2013 at 10:19PM
    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.
  • edited 27 June 2013 at 12:11PM
    psychic_teabagpsychic_teabag Forumite
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    edited 27 June 2013 at 12:11PM
    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...
  • JenIttelsJenIttels Forumite
    541 Posts
    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.
  • badger09badger09 Forumite
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    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.
  • thenudeonethenudeone Forumite
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    Newcastle BS is another
    https://www.newcastle.co.uk/maximISA
    We need the earth for food, water, and shelter.
    The earth needs us for nothing.
    The earth does not belong to us.
    We belong to the Earth
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