Bloomsbury Financial Planning

Returns on cash have tumbled to such low levels that some providers now in effect charge you to hold your money.

Thousands of investors have taken a flight to safety from volatile stock markets, holding cash in self-invested personal pension (Sipp) funds and equity Isas, and investing in money-market funds, designed to give returns ahead of cash deposits but without the risk of shares. However, figures show that around 13% of money-market funds have lost money in the past year. Once charges and inflation are factored in, investors have lost up to 21%. And, with interest rates on cash held in a Sipp or Isa standing as low as 0.5%, people are in effect paying fund managers to look after their money after charges.

“Many providers of investment wrappers, such as Sipps and Isas, cream off all or part of the interest earnings on investors’ cash holdings,” said Jason Butler at the adviser Bloomsbury Financial Planning. “As (interest) rates fall towards zero, this stealth contribution to profits disappears and any interest offered to investors goes the same way.”

Money-market funds aim to preserve capital and pay modest dividends and, until recently, were among the few places investors could put their cash and sleep peacefully. These mutual funds invest in short-term debt, such as government securities, certificates of deposit and other cash-like securities. But four out of 30 UK funds running for at least a year have tumbled into negative territory.

Threadneedle UK Money Securities fund, one of the biggest with £250m invested, has notched up the worst performance, losing 16.7% in the past year, data from Financial Express show. The fund has total annual charges of 0.62%, meaning investors have in effect lost 17.3%. Inflation compounds the problem. The Retail Prices Index (RPI) fell to 0.9% in December, down from 3% in November, driven lower by falling mortgage-interest payments. Despite that, inflation has run at an average 4% in the past year. Once this is also taken into account, the Threadneedle fund has actually cost investors 21.3%.

It is far from alone. Only three money-market funds have made a positive real return (after charges and inflation) in the past year — Fidelity Moneybuilder Cash Isa, Jessop Cash and Premier UK Money Market. However, they are up a meagre 0.68%, 0.25% and 0.1% on that basis.

“This is a truly dismal state of affairs,” said Darius McDermott at the adviser Chelsea Financial Services.

Investors in money-market funds run by Royal Bank of Scotland, Scottish Widows, Standard Life, Legal & General, Jupiter, Gartmore, Baillie Gifford, New Star, Black Rock, Fidelity and Henderson, among others, have in effect paid these companies to keep their cash in the past year.

RBS Cash has the highest total charges at 1.27%, closely followed by Liverpool Victoria UK Money Market fund, at 1.15%. The average annual charge comes in at around 0.5%, meaning investors need to make at least 4.5% to break even after inflation.

Sipps levy initial and annual charges. Standard Life, for example, charges up to £302 initially, then up to £416 annually. This works out as a total cost of 1%. However, it pays only 1% on cash held within the wrapper. Others pay even less: Sipp Centre pays just 0.1% on less than £20,000.

Those who have temporarily parked cash in equity Isas are being hit too: fund supermarkets Fidelity Funds Network and Cofunds pay just 1.7% and 0.5% respectively on cash.