Perhaps you're looking for a high interest ISA and you're comparing rates. That small difference in AER can make a big difference to the amount you'll get at the end of the term. We show you just how big a difference it makes.
If you're searching for a high interest ISA, you want to know where you can earn the most interest on your money. After all, it's your nest egg and you want it to work hard for you.
Fixed rate cash ISAs
Some ISAs have higher interest rates than others and these mean a greater return on your investment. A high interest rate throughout the entire term can generally be found with a fixed rate cash ISA. This is where the interest rate is fixed, so your deposit gains a steady interest over time.
You'll be able to make deposits (which cannot exceed the allowance limit; currently £20,000 for the 2020/2021 tax year) and you won't be able to add more to your account for the financial year. This ISA is often chosen by customers that have a sum of money to invest all at once.
Depending on the provider's criteria, you'll usually be charged an early access fee for making a withdrawal before the end of the set term. Fixed rate ISA terms usually vary from between one year up to five or more years. As such, the interest gained depends largely upon the initial deposit, and adding more each financial year.
That's why the AER is so important to monitor. It's the small things that make a big difference. And when it comes to AER, that really does apply.
A useful example
With an AER of 2.00 per cent, a deposit of £50,000 would become £51,000 by the end of the first year. A slight increase to 2.10 per cent sees that same deposit increase to £51,050 after the first year.
Whilst that may not seem like a big difference, with compound interest - the eighth wonder of the world according to Albert Einstein - the sum grows.
Here's an illustration of the difference that small percentage makes:
|Year||Year interest||Total interest||Balance|
|2.00% AER||2.10% AER||2.00% AER||2.10% AER||2.00% AER||2.10% AER|
That 0.10 per cent has resulted in a difference of £271.14 over the five years on an initial deposit of £50,000.
If you would like to find out more, take a look at our Fixed Rate Cash ISAs page.