Given Bank of England base rate at 5%, the cash float inside your investment and pension accounts should earn a decent rate of interest.
Bizarrely it is perfectly within the rules for your provider to keep as much of this interest as they see fit. Some providers make megabucks from this 😈, others make nothing 😇.
1) How much interest does your provider earn?
2) How much do they keep to boost their own profits?
3) And how much do they pass on to you?
Watch my short video here.
Spoiler alert: don’t worry if you have an account with AJ Bell, we are crunching the numbers and will let you know if you need to do anything.
For a transcript of the video, keep reading:
Hi everyone, in the last video I talked about cash versus investing. And in this video, I’m just going to talk about cash.
With interest rates where they are now at 5% and unlikely to be going down much in the future, it’s important to learn as much interest in your cash as you can.
Cash doesn’t just exist in your current account in your savings account. These days, your pensions, your investments will have a cash float and within each of those accounts that collects dividends have some other costs and charges collected from them. And with online accounts, you can log in that cash float acts like a current account, you can see every transaction going on and provides a huge amount of transparency on big fans of that. I think that’s great, then you can see exactly what’s going on.
Now that cash also earns interest and believe it or not, the providers of those pensions and investments they can keep as much as that interest as they want. It’s perfectly legal, perfectly within the rules.
So the question is, how much interest do they earn? How much do they keep and how much they pass on to their account holders?
When interest rates were negligible next to zero in the last quite a few years, this really wasn’t a concern at all. But now interest rates have come up quite so much, this is firmly on the radar. And it’s caught the attention of the Financial Conduct Authority. So I’ve got an article here from the Financial Times a couple of weeks ago. The FCA is starting to ask questions of providers as to what they’re what they’re doing about this. The article calls this you can see the bottom of the screen is called ‘client interest turn’, how much of this interest are they keeping? There are some new rules coming in, actually next week for us in the financial world called Consumer Duty where the providers are having to show that they’re providing fair value. And this is clearly one place where they’re not providing fair value. And the article specifically mentions AJ Bell and Hargreaves Lansdown.
I mention these because okay Hargreaves Lansdown is the largest platform provider in the UK, AJ Bell, a fairly sizable new arrival on the scene, but they’re noted because they’re the two providers that make the most money out of this practice. So let’s have a look how much they do make.
Hargreaves Lansdown’s latest figures for the six months to February, that turnover is £350 million and £121 million, so just more than a third, was entirely due to them keeping some of the interest of their account holders. I was hoping to have a nice little tidy screenshot of their interest rates that they paid but it was very complicated so I have summarised here in a table. If you’ve got cash float in a taxable investment account with Hargreaves, you’ll earn 1.35% interest all the way through to 4.3% on a SIPP in drawdown. Quite why there’s such a wide range I really don’t know but the people who work at Hargreaves clearly know what they’re doing. They’re not daft at all so they know they can pay these rates of interest and behind the scenes they’re earning far more than that given the amount of money that they’re earning.
AJ Bell, this article here from the end of May, their profits are up 60% and the article specifically cites the fact that there was higher interest that led to their higher profits. So here’s the screenshot from their website. They’re paying on tiered rates from 1.75% up to 2.50%. So behind the scenes, I’m sure they’re earning at least 4% on that cash for the likes of Hargreaves to be paying that much.
So don’t panic. Some of you watching this will have AJ Bell accounts, don’t worry about that. Adrian are I are crunching the numbers and if there’s anything that we are concerned about, anything we need to bring to your attention, we’ll be in touch.
So let’s move on to Transact. A lot of you watching what have accounts with Transact. Transact are very vocal that they don’t do this at all. They pass on every penny of the interest that their cash accounts earn. The left half of this page is an extract from their most recent update they sent to us earlier this month. Where it says: “unlike many of our competitors, we do not skim this is in support of our strong belief that we should do the right thing”. I agree entirely. On the right-hand side of the screen you can see the interest rates that they’ve paid in the last few months, 4.22% n the month of June.
So you know it gets to a point where this is going to start to cost people. So if you’re in any way concerned, just pick up the phone to Adrian or I and ask us the question, we’ll tell you what you’ve got where it is how much interest it’s earning, what you can do about it, and if there are any other solutions that there are out there as well.
As the phrase goes, every little helps. So just pick up the phone, we’ll see what we can do for you.