Cash grab: Savers should be rolling in interest at the moment
Savers should be rolling in interest at the moment. The Bank of England kept the base rate at a 15-year high of 5.25 per cent on Thursday, so in theory savers should be reaping huge rewards.
But sadly not all savers are benefiting as savings providers fail to pass on rate rises – and instead keep the benefits for themselves.
There is still a slew of cash savings accounts that pay well under half this level of interest, allowing the providers to swipe the rest.
What is more the financial watchdog has warned of a poorly understood charging structure used by some investment and pension firms to take advantage of savers.
If you manage your stocks and shares Individual Savings Account (Isa) or pension online, or have a share dealing account, there is a good chance you are one of those being clobbered.
Watchdog issues an ultimatum
In a stern letter to the bosses of online pension and investment platforms, the regulator called this practice ‘double dipping’.
This is when firms not only hold on to interest earned on their customers’ cash – they also charge them for the privilege.
In its letter, the Financial Conduct Authority (FCA) questioned whether firms who do this are acting ‘in good faith’ or delivering ‘fair value’.
And it warned that firms that double dip, or do not offer fair value on savings, have until February 29 to act more fairly – or face the consequences.
Of the firms surveyed by the FCA, seven in ten were found to be keeping some of the interest they earned on customers’ cash. In fact, they kept half of it, on average.
They made nearly £75 million in revenue from their customers’ cash interest in the month of June alone, it found.
And here’s the rub – of those that kept some of the interest, six in ten also charged their customers a fee to hold this cash. That’s taking two bites of the cherry.
And, what’s worse, many savers do not realise that firms are munching away at their cash interest – and charging them for the privilege.
Banks among those under scrutiny
High Street banks ought to be examining their models over the festive season.
Although the four shown in our table do not charge fees on cash held, neither Barclays, Halifax nor HSBC pay any interest on cash held inside a stocks and shares Isa. Santander pays a mere 1.2 per cent.
Brands that charge a fee on cash held on the platform, and also pay rates that are lower than the current Bank of England base rate, include household name Aviva and investment brands Vanguard and Willis Owen.
However, Aviva does pay one of the highest rates at 4.53 per cent, so even after the fee charged for holding cash is deducted, customers do not get a worse deal than counterparts using other platforms.
The table shows the interest paid by leading platforms on balances of up to £10,000 held in cash inside a stocks and shares Isa.
More than half are paying less than 2.5 per cent, compared with the Bank of England’s base rate of 5.25 per cent.
Interest paid on cash in pensions is typically higher than in Isas or general investment accounts. People typically hold more cash in a pension as they approach retirement, ready to take some money out. So it’s important the rates are higher here.
Interest rates paid on cash held in stocks and shares Isas are typically lower, as less cash tends to be held in these products.
How do the big platforms stack up?
The ink was barely dry on the regulator’s letter this week when – with fortuitous timing and just hours later – AJ Bell was first off the block to announce various pricing changes from April.
The platform was quick to confirm that it did not levy a fee on customers for any cash they hold, and also announced increases to rates paid.
The highest tier will be 4.45 per cent for sums above £100,000 that are held in a pension (the figure is currently 3.7 per cent), and this will fall to 3.45 per cent for balances of less than £10,000.
The UK’s largest stockbroker, Hargreaves Lansdown, also does not charge clients a fee for holding money in cash, although it makes significant sums from interest, reporting £269 million was made in net interest on cash in the 12 months to June 2023.
The single biggest revenue line for this investment giant came from cash.
It pays a reasonable interest rate of 4.2 per cent for sums of more than £100,000 in a pension, and 3.45 per cent for balances of less than £10,000.
Rate rises highlight poor practice
Paying paltry rates on cash has been a problem that has stained investment and pension operators for decades.
When rates were rock bottom, this issue was easy to leave lingering in the in-tray.
Now that the base rate is over 5 per cent, some finance bosses will be having an uneasy run-up to the holidays.
Admittedly, investment platforms are commercial enterprises and need to make a profit. Charging something for handling cash is of course not unreasonable.
However, they need to be upfront and clear with customers on how and what they charge – and double dipping will no longer be tolerated.
Consumers deserve to make more on the cash they hold with these providers – and it’s a shame it has taken a regulatory boot on the neck to create the change.
Holly Mackay is founder and chief executive of investment website boringmoney.co.uk
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.