As an example, if you deposit and hold £500 with a bank offering 1.5% AER and an annual compound rate, after a full year you’d receive £7.50 in interest.
Hold that balance of £507.50 for another year and, assuming the same terms apply, you’d receive a further £7.61 in interest.
The higher the AER paid and compounded, the more interest you could earn. But, if you withdraw money at any point, it will affect your potential interest earnings.
It’s not all about the AER
While the best AER might be appealing, also consider:
- How much tax you might pay on any gains.
- Whether you need regular access to your money, or can afford to lock it in.
You can benefit from tax-free savings by using:
- Your annualPersonal Savings Allowanceof up to £1,000
- Your annualISA Allowanceof up to £20,000
Fixed ISAs might offer a higher AER, but your savings could be tied in for longer and fees could apply if you withdraw money early. Easy access ISAs offer more flexibility, but a lower AER.
The AER is helpful for making quick comparisons, but make sure the savings option you select meets your individual needs.
