In recent years, the UK brokerage industry has witnessed a significant shift in the way brokers interact with their clients. One of the most notable developments is the introduction of interest payments on uninvested cash balances. This move has been driven by the increasing competition among brokers, as well as the evolving needs and expectations of UK traders. By offering interest on deposits, brokers aim to provide their clients with a more comprehensive and rewarding trading experience.
eToro
XTB
IGThis publication focuses on UK brokers that pay interest on uninvested cash, along with the implications of this practice and what requirements apply to investors looking to take advantage of it. We will examine the various aspects of interest payments, including the calculation methods, payment frequencies, and the protection of client funds. Additionally, we will discuss the pros and cons of trading with brokers that offer interest on unused cash and provide guidance on how to select the best broker for your needs.
- Investors who join eToro are eligible to earn up to 4.30% in interest annually. Interest rates for non-EU clients are tiered, meaning they vary based on one’s available cash balance. Stock investors must have $10,000 to $250,000 (equivalent to ~£185,000 at the time of writing) in their live balance to qualify.
- XTB is among the few FCA-licensed brokers offering interest on uninvested cash. UK clients of the brokerage can earn up to 4.50% from their uninvested pound-sterling deposits, 1.25% for uninvested euros, and 2% for unused US dollars. Interest is paid each month, without minimum or maximum requirements for the uninvested funds.
- IG pays interest of up to 4.25% annually (AER) on uninvested funds held in individual savings (ISA), general investment (GIA), and self-invested personal pension (SIPP) accounts, denominated in pound sterling. Eligible clients must have an active Smart Portfolio, at least one open stock position, and one or more buy or sell trades per month. Interest is paid only for cash balances of up to £100,000 across eligible accounts.
- Interactive Brokers, shortly IBKR, enables clients with sterling-denominated accounts to earn up to 3.47% on their available cash deposits. Customers with net asset value (NAV) of £80,000 and cash deposits of £20,000 are eligible for interest rates of 2.314%. Those with NAV of £320,000 and cash deposits of £80,000 qualify for higher rates of 3.47%. The rates are subject to change. Customers can use the built-in calculator for accurate and up-to-date estimates.
- Trading212 pays interest daily, offering annual equivalent rates (AER) of up to 4.35% on available cash balances in GBP-denominated accounts. Clients can withdraw their money or invest it at any time. There are no minimum or maximum requirements on eligible balances. Interest is available only on the unused cash held in investment accounts.
- Interactive Investor customers can receive interest on the balances available in their EUR, USD, and GBP standard investment accounts (known as Trading Accounts). Additionally, they can hold investments in 6 other base currencies, all in one account. As the broker uses a tiered interest system, the AER rates range from 2.02% on the first £10,000 to 3.30% on balances exceeding £1 million.
- Tickmill clients can earn a maximum interest of 2.25% annually on their unused funds held in sterling-denominated wallets. Interest is calculated daily but paid monthly. To qualify, clients need to have a total balance of at least $100 (around £75) across their currency wallets and have recent trading activity or open positions within the last 30 days. All account types except swap-free accounts are eligible for earning interest.
Brokers Paying Interest Explained
Earning interest on uninvested cash balances is a practice where brokers offer their clients a percentage of their uninvested cash balance as interest. This interest is typically calculated on a daily or monthly basis and is paid out to the client’s trading account. The interest rate offered by brokers can vary significantly, ranging from 0.1% to almost 5% per annum, depending on the broker, the type of account, and the market conditions.
For example, some brokers may offer higher interest rates for larger account balances or for clients who maintain a certain level of trading activity. The interest payments can be a valuable source of additional income for traders, especially those who maintain large cash balances or have a long-term investment strategy.
Moreover, interest payments can also serve as a way for brokers to differentiate themselves from their competitors and attract new clients. However, traders should keep in mind that not all brokers offer interest on uninvested cash, and the terms and conditions of these payments can vary significantly between brokers.
Despite some UK-friendly brokers offering interest to clients who have not invested all their cash into trading, the Financial Conduct Authority (FCA) has issued several warnings about companies that have adopted such practices. In 2023, the FCA increased its regulatory focus on how investment platforms and brokers handle interest earned on uninvested client cash. This came under the broader Consumer Duty initiative, which aims to ensure “fair value” and better outcomes for retail clients.
Broker Requirements UK Traders Must Meet to Enjoy Interest Payments
To enjoy interest payments on uninvested cash balances, UK traders must meet certain requirements set by the brokers. The conditions vary between brokers but typically include:
- A minimum account balance: Brokers often require clients to maintain a minimum account balance to be eligible for interest payments. This minimum balance can range from £1,000 to £100,000 or more, depending on the broker.
- Holding a specific type of account: Some brokers only offer interest payments on certain types of accounts. It is not unusual for UK brokers to offer interest payments on uninvested cash only to Premium or professional account holders.
- Account currency: UK brokers may pay interest on uninvested cash only if funds are in a specific currency (typically GBP, USD, and EUR). What is more, the interest rate can be higher if funds are held in GBP.
- Meeting trading activity requirements: Some brokers require clients to achieve a certain level of trading activity to be eligible for interest payments.
- Providing necessary documentation: Brokers may mandate that clients provide documentation, such as proof of identity and residence, to comply with anti-money laundering and know-your-customer (KYC) regulations.
- Agreeing to the broker’s terms and conditions: Clients must agree to the broker’s terms and conditions, including the interest payment terms, to be eligible for interest payments.
- Paid Subscription: To increase interest rates, UK traders may be asked to pay for a special subscription.
It is crucial for UK traders to carefully review the broker’s terms and conditions before opening a trading account. This will help ensure that they understand the eligibility criteria and can take full advantage of the interest payment offers.
How Brokers Calculate Interest?
Brokers calculate interest on deposit balances in various ways, and the specific method used can significantly impact the amount of interest earned by the client. The most common ones include:
- Daily balance method: This method involves calculating the interest on the daily balance of the client’s account.
- Monthly balance method: Interest is calculated using the client’s account balance at the end of each month.
- Average daily balance method: This approach calculates interest based on the average of the client’s daily balances over a defined period.
- Tiered interest rate method: Different interest rates are offered for different balance tiers. For example, a broker may offer a higher interest rate for balances above £10,000 and a lower interest rate for balances below £10,000.
The interest-calculation method used by the broker can significantly impact the amount of interest earned by the client. Therefore, it is essential for UK traders to understand the interest calculation method used by their broker and review the interest payment terms carefully.
How Often Do Traders Receive Interest on Cash Funds?
The frequency of interest payments on uninvested cash balances can vary between brokers. Some brokers may pay interest on a daily basis, while others pay it on a monthly or quarterly basis.
The payment frequency can depend on the broker’s policies, the type of account, and the market conditions. For example, some brands may offer daily interest payments for clients who maintain a high balance or have high trading activity. On the other hand, there are brokerages that only pay interest on a quarterly basis, which can result in a lower overall interest income for the client.
It is crucial for UK traders to review the interest payment terms and conditions carefully to understand the payment frequency and to plan their trading strategy accordingly. Additionally, traders should consider the compounding effect of interest payments, which can significantly impact the overall interest income earned over time.
How UK Brokers Protect the Funds of Their Clients
UK brokers are required to safeguard the money of their clients in accordance with the UK regulatory framework. The most common methods to protect client funds include:
- Segregation of client funds: Brokers are required to segregate their customers’ money from their own capital, which ensures that the former are not used for the broker’s own business purposes.
- Deposit protection: Some brokers offer deposit protection schemes, which provide a higher level of security for client deposits.
- Regulatory compliance: UK brokers that pay interest on uninvested cash are required to comply with FCA regulations, which include strict rules and guidelines for the protection of client funds.
- Auditing and reporting: Brokers are required to undergo regular audits, which ensures that they are complying with the FCA’s requirements and protecting client funds.
The FCA has also been focusing on ensuring that firms provide fair value to customers regarding interest on cash balances, particularly in the context of investment platforms and Self-Invested Personal Pension (SIPP) operators. This suggests that while brokers can pay interest on deposits, they must do so in a manner that is transparent and fair to clients. UK traders should carefully review the broker’s policies and procedures for protecting client funds to ensure that their funds are safe and secure.
Pros and Cons of Trading with Brokers Paying Interest on Uninvested Cash
Below, we have highlighted the main advantages and drawbacks of trading with brokers that pay interest on unused cash. Assessing both the pros and cons of such incentives can help traders determine whether activating interest accounts is the best decision for their investment endeavours.
The pros include:
- Higher interest income: Brokers may feature higher interest rates than traditional savings accounts, which can result in a higher overall interest income.
- Flexible terms and conditions: Certain brokerages offer more flexible terms and conditions, such as daily interest payments or tiered interest rates.
- Attractive alternative to savings accounts: If you are looking to avoid a savings account, earning yields on uninvested money through brokers can serve as a viable option.
The cons include:
- Market risks: The interest payments offered by brokers are typically subject to market conditions and can be withdrawn or changed at any time.
- Regulatory risks: Regulatory changes can impact the interest payment terms and conditions of brokers.
- Counterparty risks: Counterparty risks are another potential concern, and they can impact the safety and security of client funds.
UK residents should carefully consider the pros and cons of trading with brokers paying interest on unused cash and weigh the benefits and risks before making a decision.
How to Pick the Best Broker Paying Interest on Deposits
While a high interest rate might be the most obvious consideration that governs the choice of a brokerage, we recommend UK traders take into account several other factors whenever they are choosing a broker to trade and invest with. To pick the best broker that pays interest on deposits, UK traders should consider the following characteristics of any potential options:
- Interest rate: The interest rate offered by the broker should be competitive and align with the client’s investment goals.
- Terms and conditions: A suitable broker will ensure that the interest terms and conditions are clear and transparent, and that the client can understand the interest calculation method, payment frequency, and any applicable fees.
- Regulatory compliance: An FCA license is a must. It ensures compliance with the UK regulatory framework, offering top-notch protection for UK traders.
- Client fund protection: The broker needs to have a robust client fund protection policy, which includes segregation of client funds, deposit protection, and regulatory compliance.
- Reputation and reviews: The broker should have a good reputation and positive reviews from existing clients.
- Trading platform and tools: Look for brokers offering a user-friendly trading platform and a range of trading tools and resources.
As long as they keep the above factors in mind, UK traders will be able to find a brokerage that pays interest and is suitable for their investment and trading goals.
FAQ
Can UK traders earn interest on uninvested cash in a tax-free manner?
Interest earned on uninvested cash is generally subject to income tax in the UK. However, UK traders may earn tax-free interest if their funds are held within tax-advantaged accounts such as a Stocks and Shares ISA or Cash ISA. Outside of these wrappers, interest is taxed under the Personal Savings Allowance (up to £1,000 per year for basic rate taxpayers).
Do FCA-regulated brokers pay interest on uninvested cash?
Some FCA-regulated brokers do offer interest on uninvested cash balances, but this is not a regulatory requirement, and not all brokers provide it. Interest is usually tiered and depends on the amount held and the currency. Traders should review each broker’s terms, as interest rates can change in line with market conditions and may come with minimum balance requirements or account fees.
Can UK traders earn interest on uninvested cash held in multiple currencies?
Yes, certain brokers offer interest on uninvested balances held in currencies like GBP, USD, or EUR. However, this may expose traders to foreign exchange risk. Any interest earned in a foreign currency is subject to UK tax, converted to GBP at the appropriate exchange rate for reporting.
How do UK brokers protect clients’ uninvested cash from cyber threats or misuse?
FCA-regulated brokers are required to segregate client funds from company assets and implement robust cybersecurity protocols. These typically include encryption, firewalls, intrusion detection systems, and regular compliance audits. Additionally, client funds may be eligible for protection under the Financial Services Compensation Scheme (FSCS), up to £85,000 in case the firm fails.
Can interest on uninvested cash be used as a source of regular income for UK traders?
While some brokers offer interest on idle cash, the rates are usually modest, and this should not be relied upon as a primary source of income. Traders looking for steady income should consider a diversified portfolio that may include dividend-paying assets or fixed-income products, depending on their goals and risk tolerance.