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How Does Brexit Affect Cash Savers?

UK investors increased their cash holdings amidst the Brexit uncertainty. We reveal the accounts with the best interest rates on the market 

Karen Kwok 28 June, 2016 | 4:21PM

UK investors increased their cash holdings ahead of a Brexit outcome last week, analysis from an online investment platform revealed – as fears about the future of the stock market sent them running to safe haven assets. 

New investments into cash are up 408% from April to June this year; as investors sold out of UK and European equities, as uncertainty grew over the European Union referendum, according to rplan.co.uk. The level of new investments into cash was also up 411% from January to June compared to the same period last year.

Holding Cash Amidst the Uncertainty

And this trend is set to continue. Anna Bowes, director of SavingsChampion.co.uk suspects that “continued uncertainty is likely to prolong a flight to safety which means more and more people piling their funds into cash”.

Chris Rice from Sanditon Asset Management echoes Bowes’ views, saying last month in Morningstar Investment Conference that cash is the “first line of defence” in uncertain times.

“We have said to our clients for some years now that the likely way of defending yourself in a long/short portfolio, if you can, is to get net short the market and that would be another way of seeking protection,” Rice said.

Savers are most interested in locking at least some of their funds into fixed rate products according to data provided by SavingsChampion.co.uk. Fixed rate bonds account topped the most popular “hit” list since the day of a Brexit vote. The following product was fixed rate ISA account and easy access account.

“It makes sense to take advantage of not only the better rates that are available on fixed rate products, but also the fact that the rate can’t fall throughout the term – so offering some stability during this period of uncertainty,” Bowes added. 

Interest rates in the UK and Europe are likely to stay close to zero for “as far ahead as” people could realistically forecast after the Brexit vote, James Klempster at Momentum GIM said.

“It is increasingly likely that the Bank of England will cut interest rates in the UK from current levels of 0.5%,” Klempster said.

Strategists and portfolio teams at BlackRock agree, expecting the UK central bank to cut its 0.5% policy interest rate to zero soon, and seeing it returning to quantitative easing rather than pushing rates into negative territory. Ian Kernohan, economists at Royal London Asset Management thinks the Bank of England will cut interest rates in the third quarter of the year.

Where Can Savers Find the Best Interest Rates?

There are providers who are still interested in raising funds from savers, especially as they too are uncertain about the immediate future, according to Bowes. However, investors need to be proactive, and shop around for the very best rates they can find, which may include high interest current accounts or fixed rate bonds.

Dan Plant, consumer affairs expert at MoneySupermarket.com agrees, in the minimum two-year negotiations between the EU and the UK, “savings rates could go up or down, or stay much as they are”.

“If you want some certainty of what you’ll earn in interest, fixing your rate is one way forward,” Plant suggested.

For savers who are looking to fix their cash ISA rate, Nationwide Building Society’s five year fixed rate ISA tops the best buy table with a rate of 2%. This account requires a minimum deposit of £1, accepts transfers in and is operated both branch and online. However, withdrawals are allowed subject to 365 day’s loss of interest.

For fixed rate cash bond accounts, Raphaels bank’s five years fixed rate bond offers the best rate at 2.35% with a minimum deposit of £5,000. It gives no access within the term and it operates by post only. Bear in mind that this account does not benefit from tax-free status.

If savers want to lock money up for a less restrictive period of time, Buckinghamshire Building Society’s one year fixed rate cash ISA Issue 50 paying a rate of 1.25%. The account requires a minimum of £100, and is operated by branch or post. Withdrawals are allowed subject to the loss of 50% of the interest for the remaining term.

Savers on the hunt for a best-buy easy-access cash ISA should look to RCI Bank’s Freedom Savings Account which pays 1.45% with a minimum deposit of £100. It operates online.

For variable rate ISA accounts, Clydesdale Bank/Yorkshire Bank’s cash ISA 40 day notice account offers the best rate at 1.50%. However transfers in are not allowed and the account requires a large minimum deposit of £15,000. Withdrawals are subject to 40 days’ notice or loss of interest.

Across notice accounts, Charter Savings Bank offers the best rate at 1.55%, with withdrawals subject to 95 days’ notice only, no earlier access. It requires a minimum deposit of £1,000 and it operates online.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Karen Kwok

Karen Kwok  is Editorial Assistant for Morningstar UK