Why are investment firms paying next to nothing on your cash?

Investors who have cash sitting in their trading account could be earning five times more interest by moving it somewhere else.
Customers typically keep about 5 to 10 per cent of their investment portfolio in cash so that it can be easily put to work when an opportunity arises. But investment firms are being investigated by the regulator for not passing on interest rate rises to customers.
The Bank of England’s base rate rose 14 times from a record low of 0.1 per cent in December 2021 to 5.25 per cent in August 2023. It stayed there until August this year, when it dropped to 5 per cent. The Financial Conduct Authority (FCA), the City regulator, has already reproached high street banks for failing to raise savings rates, and is now investigating ten investment platforms.
It is not known which firms are being reviewed but the regulator has highlighted poor practice, including one firm that justified its low interest rates by saying “without adequate elaboration, that this helps with the costs of running its platforms”.
The regulator will not be able to force companies to raise interest rates but it could ask them to justify the interest they pay under its Consumer Duty rules, which say that firms must ensure “good outcomes” for clients.
Uninvested cash is one of the biggest revenue generators for financial firms because they can earn a higher rate of interest on it than they pay to customers. In September 2023 Hargreaves Lansdown, the UK’s largest investment platform, said it had made more money from cash than from funds or shares. Revenue from cash rose from £50 million to £268.7 million in the year to June 2022, it said.
Analysis by Money of 11 popular investment platforms showed a huge variation in the interest paid on cash. The highest was 5.1 per cent from Trading 212, which was comparable with the top rates on easy-access savings accounts. However, the money is kept in a money market fund. These invest in government bonds that are relatively low risk, but are not as safe as cash.
The highest rate paid on cash was from Nutmeg, which pays 0.75 per cent below the Bank rate — so 4.25 per cent at the moment.
The lowest was 1 per cent from Freetrade on cash reserves of up to £1,000. You can earn more if you pay a monthly fee. Those who subscribe to the Standard package for £4.99 a month earn 3 per cent on up to £2,000, so a maximum of £60 a year — just 12p more than the annual fee. Those who pay £9.99 a month earn 5 per cent on up to £3,000, a maximum of £150, which is £30.12 more than the annual fee.
Alex Campbell at Freetrade said: “We are committed to delivering our customers value for money. This includes providing a wide selection of low-risk assets, like UK government bonds, with yields around 5 per cent that offer an ideal short-term home for cash between investments.”
Vanguard, which specialises in low-cost tracker funds, pays a flat 2.45 per cent on cash, which it says is fair and offers “good value”. According to its website, the firm keeps extra interest to cover its costs and develop its products and services.
Vanguard said the interest it pays is “reviewed periodically, in line with bank deposit rates, and the cost of administration. This approach is intended to be simple and scalable and allows us to focus on our core purpose as an investment platform; helping investors achieve their investment goals.”
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Sometimes the interest paid depends on which account you have and the size of your pot. For example, AJ Bell pays 1.95 per cent on up to £10,000 held in a general dealing account, and 2.25 per cent on sums above £10,000. However, it will pay 3.25 per cent on cash in a self-invested personal pension (Sipp) that is being drawn upon, rising to 4.45 per cent on sums above £100,000.
AJ Bell said: “Only 20 per cent of accounts on our platform are general dealing accounts and customers are free to transfer their cash to a higher-paying account without losing any tax benefits.” It said its range of rates “compares well to rates paid by other platforms and high street banks and our service is primarily used for investing, not cash savings”.
Interactive Investor pays 1.75 per cent on the first £10,000 of cash in a trading account, rising to 4.5 per cent on sums above £1 million. Sipp customers get 2.75 per cent on the first £10,000 and up to 4.5 per cent on balances above £1 million.
The company said: “We routinely assess our service offering, which includes a regular review of the interest we pay on cash. We are an investment platform, not a bank. We are fully committed to transparency on rates, and in our customer communications, and we offer a full range of investment options, including an array of cash alternatives such as fixed income, money market, and a cash deposit service.”
If you plan not to invest for a while and have a large amount in a trading account, it may make sense to hold your money in an easy-access savings account instead. The downside is that it may take a few days to move money to your trading account. You may also have to pay tax on your interest if you earn more than the personal savings allowance of £1,000 a year for basic-rate taxpayers, and £500 for higher-rate payers. Additional rate taxpayers get no savings allowance.
The highest easy-access rate is 5 per cent from the savings app Chip. On £10,000 you would earn £500 before tax over a year. If that cash was held in an Interactive Investor trading account you would get just £175.