Comparing savings rates like for like
Most people choosing a savings account start with the headline rate.
Two rates that look close can pay different amounts once bonuses, access rules and tax are taken into account. These notes explain how to read the figures so two offers can be compared fairly.
AER and gross
AER stands for annual equivalent rate. It shows what the yearly rate would be if interest were added to the balance each time it is paid.
Where interest is paid once a year, the quoted rate and the AER are the same. Where it is paid monthly, the AER is a little higher than the quoted rate.
The gross rate is the rate before any income tax. When one account pays monthly and another pays yearly, the AER is the fairer figure to compare.
The summary box
UK rules from the Financial Conduct Authority (FCA) say that a savings advert you can apply from must include a summary box. The box has set headings in a set order.
- What is the interest rate?
- Can the firm change the interest rate?
- What would the estimated balance be after a set number of months?
- How do I open and manage my account?
- Can I withdraw money?
The rates must appear in the box itself, not behind a link. If more than one rate can apply, the lowest one must be shown just as clearly as the others.
Bonuses, tiers and conditions
Some accounts pay a higher rate for a set period at the start. Others pay different rates on different slices of the balance, or a higher rate only if you make no withdrawals. The summary box should explain each of these.
The estimated balance is a useful check. It usually assumes £1,000 paid in at the start, with nothing added or taken out.
When an introductory rate ends, the box should show the balance on that date and again a year later. Comparing those figures shows what the account pays after the bonus ends.
Access and notice
The box should say whether you must give notice before taking money out. It should also say if a withdrawal cuts the interest or brings a charge.
For a fixed-term account, it should explain what happens at the end of the term. It should also say whether the firm can change the rate, and how it will tell you.
Tax and ISAs
Tax can change which of two offers pays more. Most people can earn some interest without paying tax on it, through the Personal Savings Allowance. Interest above your allowance is taxed, and higher and additional rate taxpayers get a smaller allowance or none.
Interest on cash in an ISA is not taxed. So when an ISA and an ordinary account show similar rates, the ISA may leave you with more.
To move an ISA for a better rate, ask the new provider for a transfer. Taking the money out yourself usually loses that part of the allowance, unless the ISA is flexible. A transfer between cash ISAs should take no longer than 15 working days.