Since the EU Referendum result was announced, much of the focus has been on the reaction of the world’s stock markets. So far, despite a brief period immediately following the vote to leave the EU, the markets have been relatively benign.
However, the effect on savers of the decision to leave has received less attention, but there are worrying signs that this group of people could suffer as a result in the months and years to come.
Existing problems
Since the financial crisis of 2008, savers have had to put up with a number of factors, which have combined to reduce real returns. These have included:
- Bank of England Base Rate set at 0.5% for almost a decade
- Government assistance for banks and building societies, which reduced their need to attract money from savers
- Inflation which has, at times, been above the interest rate offered on savings accounts, resulting in a real terms loss
However, amongst the general doom and gloom felt by most savers, there has been the odd glimmer of hope, including changes to ISA (Individual Savings Account) rules to allow more capital to be sheltered from tax and the introduction of the Personal Savings Allowance, which will allow most savers to receive interest without needing to pay tax.
Worrying times ahead?
However, following the decision to leave the EU, there are worries that a twin threat could cause further pain for savers.
Firstly, the Bank of England has already indicated that interest rates will have to fall further following the Brexit decision. Any reduction would undoubtably be reflected in lower interest rates for savers.
Secondly, there are fears that as the cost of imported goods rises on the back of the weaker pound, inflation will rise; with the Consumer Prices Index (CPI) forecast to hit 3 – 4%. Any increase could be exacerbated by additional Quantitative Easing, which the Bank has indicated may be necessary.
Real terms loss
If the predictions of inflation hitting 3 – 4% are correct, even if interest rates remain unchanged, there is little doubt savers will see the value of their capital falling in real terms.
Furthermore, those people who rely on savings interest for part of their income will certainly see this fall.
Options?
This nightmare scenario of rising inflation and falling interest rates may seem like a case of Groundhog Day for savers, and the options to offset the effects are limited:
- Shop around: Savers need to actively shop around for the best interest rates, too many take a passive approach and therefore lose out on the best rates
- Get online: The best interest rates are usually paid on accounts which are opened and administered online. Savers without internet access are therefore penalised with lower rates
- Consider non-high street names: Many of the accounts paying the highest rates of interest are offered by banks which are new to the UK and are therefore likely to be a new name to many people. Providing they are covered by the Financial Services Compensation Scheme (FSCS) we would suggest you consider these banks as alternatives to more traditional options
- Reduce tax: The tax you pay on your savings interest will eat into the real return you receive. Make sure your savings are held as tax-efficiently as possible and that you take advantage of both Cash ISAs and the new Personal Savings Allowance
Of course, you could also consider changing from a saver to an investor and taking some additional risk with your capital, in the hope of higher returns. You should remember thought that you are not guaranteed to make a profit and the investment (and income from it) can fall as well as rise.
Although, in these early post-Brexit days, the effect on all investment options has to have an element of uncertainty and should therefore be considered cautiously.
Here to help
If you are concerned about the effects of Brexit on your savings, we are here to help.
Call Bev or Sarah on 0115 933 8433 or email info@investmentsense.co.uk
Please note, the Financial Conduct Authority does not regulate deposit accounts.
