AER, or annual equivalent rate, is a savings figure that shows the interest a balance would earn over a year once compounding is taken into account. It lets savers compare accounts that pay interest at different frequencies on a single basis.
In one line: AER standardises savings rates by assuming interest is compounded for a full year, making different accounts directly comparable.
How AER works
AER is quoted on savings and current accounts so that monthly, quarterly and annual payers can be compared fairly. It reflects what would be earned if interest were left in the account and itself earned interest over twelve months.
On 10,000 GBP at 4% AER, a saver would earn about 400 GBP over a year. An account paying 3.93% gross monthly can still show 4% AER because the monthly interest compounds, so the headline AER captures that effect.
The gross rate is the simple rate before compounding, while the AER shows the effective yearly return, which is why the two figures can differ slightly on the same account.
AER vs gross rate
Gross is the rate paid before any compounding and before tax. AER expresses the same account as a single compounded yearly return.
AER is the savings counterpart of APR on borrowing and of EAR on overdrafts, so comparing accounts by AER avoids being misled by how often interest is credited.
Primary source: FCA Handbook BCOBS (savings rate disclosure)