Better known as a global investment giant, Vanguard is currently paying a highly competitive interest rate on cash parked in its ISA, SIPP, and general trading account products. Vanguard doesn’t publicise it but you can currently earn a Vanguard cash interest rate of 3.0935% to 3.1% on money you leave uninvested in its platform.
This ‘hidden’ Vanguard interest rate compares very favourably against leading easy-access savings accounts and cash ISAs topping the ‘best buy’ tables at the time of writing.
Vanguard cash interest: how it’s calculated
Vanguard’s interest rate is calculated on your cash balance like this:
The Bank Of England base rate (currently 3.5%)
0.25% Vanguard’s deduction from the base rate
0.15% Vanguard’s account fee
Up to 0.2% Vanguard charge on interest received
Note: the 0.2% is deducted from the interest you earn. It’s not a 0.2% fee applied to your total cash balance. That makes this charge much smaller than it appears at first glance, as we’ll see below.
Tot those numbers up and you’ll earn a minimum 3.0935% Vanguard cash interest on uninvested cash lying idle in a stocks and shares ISA, Junior ISA, SIPP, or general trading account.
Vanguard interest rate: an example
Vanguard doesn’t publish its cash interest rate. It’s like a secret menu item at KFC.
Moreover, the clues to its existence are confusing, so let’s work through an example to see just how good the interest payments are.
Imagine you’ve stashed £10,000 in your Vanguard account.
£10,000 x 3.25% Vanguard cash interest rate = £325 interest earned
£10,000 x 0.15% account fee = £15 deducted
£325 x 0.2% Vanguard admin charge on interest = £0.65 deducted
£325 – £15 – £0.65 = £309.35 net interest earned
(£309.35 / £10,000) x 100 = 3.0935% Vanguard interest rate
Or: 3.5 – 0.25 – 0.15 – (3.25*0.002) = 3.0935% interest paid on cash.
Right now, that’s a generous rate!
Are there any wrinkles?
Quite a few! Both positive and negative things to be aware of.
Monevator reader WCTL Flashheart first tipped us off about Vanguard’s interest rates. WCTL Flashheart said the cash payments they received increased with every hike from the Bank Of England.
In other words, Vanguard is quick to pass on the benefit of interest rate rises. Quite unlike some other financial institutions we could mention!
About that confusing interest charge
Vanguard’s cash interest rate is poorly advertised, to say the least. The fullest explanation is in the Vanguard Client Terms document. (Access the latest version from its terms and conditions page).
This document says (emphasis is mine):
We do not charge a service fee for holding your cash. Instead we currently keep up to 0.20% of the interest rate we receive on cash held in your account, to cover our costs of administering it. This rate is determined by reference to the interest we receive and the cost to us of managing the cash within your Account.
In the event that we are not able to sufficiently recover our costs from the interest we receive we reserve the right to levy an additional service fee of up to 0.20% by written notice in accordance with clause 10.
If Vanguard decides not to levy the full 0.2% on interest received, then you’ll earn a slightly better rate: up to 3.1%.
Reader WCTL Flashheart calculates they are earning 3.1% in their SIPP, for example.
Meanwhile Vanguard customer service didn’t mention the 0.2% charge to me and say the interest rate is the same for all accounts.
However, as you can see in the clause above, Vanguard may charge up to 0.4% on interest received.
Thankfully that won’t do much damage. A charge of 0.4% on 3.25% reduces your Vanguard cash interest rate to 3.087%.
What about this account fee and service fee business?
Vanguard’s website says: “We do not charge a service fee for holding your cash.”
Many people might innocently assume that means Vanguard doesn’t charge its 0.15% account fee on cash holdings.
But Vanguard customer service has confirmed that the 0.15% charge does count against cash.
So while it’s lovely that Vanguard doesn’t charge a service fee, it does charge an account fee. Because those two things are, um, completely different, obvs.
There is an account fee cap
Once the value of all your accounts (investments and cash) passes the £250,000 mark then your account fee tops out at £375.
So if you’re stuffing away cash at Vanguard beyond that threshold, you’ll earn a 0.15% bonus rate.
Admittedly while simultaneously throwing away cash – because there are rival brokers who’ll charge you a much cheaper flat fee for holdings way below the £250,000 level.
(See the flat fee brokers section of our broker comparison table for a better deal.)
When is interest paid and are there any other catches?
Interest is accrued daily, but you don’t earn a bean on cash awaiting withdrawal or cash that’s paid into a regular savings plan.
According to the client terms document:
If you set up a Regular Savings Plan to make regular Payments or Contributions we will not pay interest on your Payment or Contribution before it is invested.
Is the cash ‘easy access’?
Cash parked in your Vanguard SIPP can’t leave until you hit the minimum pension age. That’s age 55 at best, so perhaps this route is for retirees only.
Junior can’t withdraw from a Junior ISA until age 18. (Probably a good thing on balance…)
However you can withdraw anytime from a Vanguard stocks and shares ISA, or a general account.
Vanguard’s ISA is flexible so you can withdraw money and not lose that year’s ISA allowance if you pay back the cash inside the same tax year. Hit that last link for a refresher on the flexible ISA rules.
Vanguard’s withdrawal terms are also pretty easy going:
There is no minimum withdrawal amount and no requirement to maintain a minimum account balance.
Obviously though it’s not like moving cash in a flash on a banking app. It could take a good few days for your cash to actually land in your bank account.
Please let us know in the comments if you have firsthand experience of how long it takes Vanguard to stump up after a withdrawal request.
FSCS compensation protection
Famously, cash and investments are protected up to £85,000 by the FSCS compensation scheme.
Vanguard deposits your cash with HSBC bank. So if Vanguard went down and your cash was stored with HSBC at the time then all is well – provided the bank remains standing.
If HSBC defaulted then your Vanguard cash would be a risk. In that scenario, your ultimate backstop is the FSCS cash compensation limit of £85,000. But that claim would be set against your cash at HSBC, not Vanguard.
Moreover, your £85,000 worth of protection is measured versus all the cash you’ve lodged at HSBC.
So if you have a HSBC savings account worth £85,000, plus a Vanguard cash balance of £85,000, you’re still only covered by the FSCS for £85,000. Not £170,000.
This rule applies across the board with the FSCS. The protection limit applies:
Per authorised firm – including their sub brands
Per person – so joint accounts are covered up to £170,000
Per claim category – i.e. cash is one category and investments another. That means all your investment funds held with one institution are only covered up to £85,000
So to avoid breaching the FSCS ceiling you must only keep £85,000 total in cash at all HSBC related accounts, including Vanguard, First Direct, and any other brokers who deposit with HSBC.
Obviously Vanguard could change its partner bank. But it says it’ll let account holders know in that event.
Some brokers divide client money between multiple banks to diversify the risk of a default.
AJ Bell claims:
If we held 20%, or one fifth, of your cash with a bank that failed, up to £425,000 would be fully protected by the FSCS (i.e. 5 x £85,000).
Vanguard only mentions HSBC, though.
Will Vanguard’s cash interest rate remain competitive?
Vanguard’s business is investing not banking. If it is flooded with cash from UK money mavens then I suspect we’ll find it dropping down the ‘savings account’ league table pretty quickly.
But for now Vanguard’s cash interest rate is a welcome point of difference that’s much higher than rivals such as Interactive Investor, Fidelity and AJ Bell.
Enjoy it while it lasts.
Take it steady,
The post The excellent Vanguard cash interest rate hiding in plain sight appeared first on Monevator.