Strategies for Investment Platforms: Preventing Cash Holdings from Earning Sub-2% Rates and Securing superior Returns
Investors must carefully consider the interest rates earned on their cash holdings, as some platforms offer rates as low as 2% while others exceed 4%. The wide range of interest rates paid by investment platforms on uninvested cash reflects a competitive market.
Several large investment platforms provide amongst the worst rates, with customers receiving just 1% or 2%. However, numerous apps and a few wealth management platforms buck this trend with higher rates in an effort to gain a competitive edge.
Many investment platforms have lowered interest rates paid on cash balances this year. Customers typically receive rates significantly lower than the Bank of England base rate and even the top savings accounts. Currently, the top easy-access savings account pays 4.75%, while the market-leading one-year fixed savings account offers 4.65%.
Following multiple cuts to the Bank rate, platforms have reduced interest rates on cash holdings. The Bank rate is currently 4.5%, having been lowered from 4.75% in February. Platforms' decisions to lower cash rates when the Bank rate decreases are generally understandable; yet, some of the rates remain particularly low, potentially shortchanging investors with cash balances in their portfolios.
The Financial Conduct Authority (FCA) has previously communicated to investment firms its intention to intervene if they do not offer fair value on customers' cash balances. Firms are reportedly earning £74.3 million in combined revenue by failing to pay a reasonable amount of interest (and retaining some of the interest) or charging fees for holding customers' cash.
The interest earned on cash balances is crucial, considering many investors move money into cash within their account while waiting for opportunities to invest or markets to settle. Some may temporarily park their money in cash as they rush to use up their pension or ISA allowance before the tax year ends.
The interest rates offered by popular platforms and apps were compared, revealing varying rates. While some, such as Barclays and Interactive Investor, continue to provide low rates, others offer rates above 4%.
A diverse range of interest rates for uninvested cash have emerged in the UK market, with platforms like IG and XTB leading with rates above 4.5%. Other platforms, such as AJ Bell and Hargreaves Lansdown, offer tiered interest rates based on account type and balance. Interactive Investor, for instance, provides scaled interest rates depending on the account type and balance. It's essential to review the specific conditions and balance tiers for each platform to maximize interest earnings.
- With competition in the market, some investment platforms offer higher interest rates on savings, surpassing 4%, to attract more customers.
- The Financial Conduct Authority (FCA) has expressed concerns about investment firms not offering fair value on customers' cash balances, potentially earning millions in revenue from low interest rates or fees.
- As the interest earned on cash balances can play a significant role in personal-finance planning and pension management, it's crucial for investors to review and compare the interest rates offered by various platforms and apps to optimize their savings and pension pots.
