Trading 212’s ‘Earn Interest on Cash’ Explained (There’s a Catch)

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This is not financial advice. We are not financial advisors. Investments can decrease in value. Capital at risk.

Trading 212 makes a big splash about the fact that it offers 5.17% interest on the uninvested pounds within investing accounts.

This interest is paid on a daily basis within both Trading 212’s ‘Invest’ and Stocks & Shares ISA accounts, and can be withdrawn at any time.

It’s a pretty competitive rate that even beats many of the Cash ISAs on the market — and even fixed-term accounts where savings are locked away for years on end.

Trading 212 achieves this by holding uninvested cash in bank accounts and qualifying money market funds, known as QMMFs for short.

But how do you know where your funds are being held, and how much of your savings will be protected by the Financial Services Compensation Scheme (FSCS)?

What are QMMFs?

QMMFs are tightly regulated funds that typically hold financial assets like government bonds — and designed to be low risk while offering slightly higher returns than bank accounts.

They’re commonly used as a cash equivalent in pension funds — Trading 212 isn’t the only provider to place uninvested cash in QMMFs.

Is money protected?

Your uninvested money is stored in a range of banks and QMMFs.

If a bank that Trading 212 used to store money on your behalf went bust, FSCS rules ensure you would be compensated up to £85,000.

However, FSCS protection doesn’t apply to QMMFs and your funds would be treated as investment losses.

This means that — if a QMMF was to suffer financial difficulty — there’s no FSCS protection.

In the worst-case scenario, you would not be made whole. Only the portion of your money that was being stored in bank accounts would be covered.

How risky are QMMFs?

Trading 212 says it “carefully selects all QMMFs to ensure they are highly liquid, stable in value and maintain their highly regulated status”.

And while there are risks associated with these funds, the company says it has safeguards in place to mitigate them.

One primary danger is a QMMF becoming insolvent — and according to Trading 212, it uses high-quality funds and monitors them continuously.

Another scenario could see an investment manager make poor choices that put funds at greater risk. To counter this, the trading platform says it only works with reputable providers.

Despite all of this, unknowns can plunge a QMMF into uncertainty.

One of them concerns sudden increases in interest rates, which can affect the value of the assets that a fund has invested in. Trading 212 navigates this by picking QMMFs that primarily invest in short-term bonds.

And in the event of extreme market conditions meaning that there’s a run on QMMFs — resulting in delays to withdrawals — Trading 212 says it makes sure there’s an adequate amount of client money in liquid cash so withdrawals can be processed immediately.

Can interest rates change?

It’s worth bearing in mind that the interest rates on offer can fluctuate, and they’re normally set by the banks and QMMFs that Trading 212 has chosen to use. They tend to be adjusted whenever the Bank of England makes changes to its base rate, or whenever Trading 212 chooses.

The risk and your options

QMMFs are commonplace — and according to figures from Trading 212, more than £5.5 trillion were invested in these funds across the US and Europe as of January 2024.

Because they primarily have exposure to government bonds — and countries like the UK and US have an immaculate track record of paying debts — they’re deemed to be relatively safe.

But as with most things in life, there is still a small amount of risk.

Here’s what the principal and head of Vanguard’s taxable money markets, Nafis Smith, had to say about money market funds:

“Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.3 The second was during the financial crisis of 2008, because of assets held with the then recently bankrupt Lehman Brothers.”

There are a few other things worth mentioning at this point.

For one, Trading 212 only places uninvested cash in QMMFs after receiving consent from its customers. To do that, you need to hit the ‘Earn interest on cash’ button in the menu at the top of the screen.

You’ll then be given a detailed explanation about the main risks associated with QMMFs — as well as a link to some FAQs — before clicking ‘Enable’.

A dashboard is also available that sets out how much of your uninvested cash is held in banks and QMMFs, with these figures presented in monthly statements too. The share of your money held in banks is protected by the FSCS.

Most importantly of all, the interest-bearing features offered by Trading 212 can be disabled at any time — meaning you’re always free to change your mind in the future.

DIY

There are a couple of other catches with regards to Trading 212’s cash interest — the first being that you could technically invest into QMMFs yourself, in the same way that Trading 212 do.

This cash interest feature is merely simplifying a niche investment task — with Trading 212 taking a small cut of the returns in the process.

Editor’s note: The exact cut they’re taking is not listed on their website at the time of writing, but we do not believe that it’s a significant amount.

Taxes

Like with other investments in stocks, bonds and similar, you will pay tax on your cash interest once you’ve used up your Personal Allowance.

However, if you make use of the cash interest feature within Trading 212’s Stocks & Shares ISA, you won’t pay tax on your profits due to investing in a tax-efficient way.

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