A savers guide to actually understanding Annual Equivalent Rate (AER)
Published: 16 June 2026
So, you're shopping around for a new savings account. You've seen a Cash ISA and you like the look of the rate, for example 3% AER. There's just one problem: you don't know what the 'AER' bit means, or how it works.
Don't worry, we'll make it simple for you, because AER is something every saver should know about.
What does AER mean?
AER stands for Annual Equivalent Rate. It might sound complicated, but it shows the rate of interest your savings could earn over a full 12 months - hence the name. You'll see it shown as a percentage - such as 3%.
Providers must use the same formula to calculate the AER for each savings account. So, if you're choosing between a few different options, you can compare the AERs to give you an idea of the potential interest you could earn.
How can AER help you choose the right account for you?
With savings accounts, you can either go for a fixed or variable interest rate. The rate is locked in for the term of the account with a fixed account, but variable rates can rise or fall over time (and that means their AER can, too).
AER helps you compare the accounts you're interested in because you can see what interest you might get back.
What is AER interest?
The AER takes into account what's called compound interest. Sounds technical, but honestly, it's not.
All it means is if you leave the money where it is over time, you'll get interest on top of the interest you've already earned - as well as the amount you put in. It's a bit like a snowball rolling down a hill - it gets bigger the longer it rolls.
How does compound interest work?
Let's break it down. If you started with £100, and paid it into an account with a fixed AER of 3%, assuming interest is being paid annually, after 12 months your interest would be £3.
The following 12 months, you'd earn 3% interest on £103 (the original balance plus the interest). That would be £3.09.
In that the third year, you'd earn 3% interest on £106.09 - the original balance plus two years' interest. That works out at £3.18.
3% AER interest example
Year 1:£100 x 3% = £3
Year 2:£103 x 3% = £3.09
Year 3:£106.09 x 3% = £3.18
Total: £109.27
The AER considers how often your account pays interest - this is usually annually or monthly but could also be every three or six months.
Remember, the more you save, the more interest you'll earn.
What is the difference between AER and gross interest?
Gross interest is the rate of interest you'll earn on your savings before tax has been considered. It doesn't take into account when interest is paid and compounded.
But AER does. It gives you a more accurate picture of how your savings pot could grow over time.
What is the difference between APR and AER?
AER and APR (Annual Percentage Rate) sound similar, but they couldn't be more different.
AER is all about the interest you earn on your savings, but APR is about the interest rate you'll be charged to borrow money.
So, you need to know an account's AER if you want to save money. But if you're taking out a loan or a credit card, check the APR before you sign up.
One last thing...
AER isn't the only thing you should think about when opening a savings account. There's also stuff like:
- Do you want to lock your savings away or take money out every now and again?
- Will you have to pay tax on any interest you earn?
- Is it an online-only account or can you use a branch if you need to?
Remember - although AER is important, the right savings account for you may not always be the one with the highest AER.
This article is not advice, and you should seek independent financial or legal advice if needed.
