Ahead of the EU referendum many UK savers opted for low risk savings accounts or even put off the decision of what to do with their Individual Savings Account (ISA) allowance all together. This has resulted in what some are calling a ‘cash mountain’. With the value of the pound falling and interest rates anticipated to be cut further there may just be potential for investing your ISA allowance.
Good news for savers is that the ISA tax wrapper is provided by the UK Government, so it is not going anywhere as a result of the vote. Whilst it is not beyond the realms of possibility, it is unlikely that the UK Government will change the terms of the ISA allowance. This tax year savers have an allowance of £20,000.
The impact of BREXIT on ISA savers
BREXIT is likely to have 4 key impacts on ISA savers:
- Interest rates could fall even further. The Bank of England have held these at 0.5% for the past 7 years, but there is speculation that interest rates could go as low as 0.3%. The retail banks interest rates follow those of the central banks so we are likely to see the average rate on a cash account further.
- Inflation could go as high as 4%. The Bank of England have an inflation target of 2%. An increase of inflation by this amount would squeeze wages and slow the economy. Many ratings agencies have already downgraded the UK’s growth prospects.
- The value of the pound is falling. It has been widely documented that the value of sterling took a huge hit after Friday’s announcement; what that means for savers that any money in cash is worth less.
- Markets are extremely volatile. On Friday the FTSE 100 was down to levels not seen since the financial crisis in 2008, yesterday it was back up to its pre-BREXIT value. With changes such as this investors are likely to see their balance change on a daily basis.
How to invest after fallout Friday
With the value of our cash in sterling falling, interest rates set to drop and inflation set to increase there has never been a better time to consider investing.
Prior to the result of the EU referendum individuals saving in cash were losing close to £140 a year to inflation. What that means is that their money would not go as far.
Having said that when markets are volatile investing becomes more difficult. Many advocate taking the little and often approach at times of financial uncertainty, this is called Pound Cost Averaging. Investing small sums regularly allows you to take advantage of market drops but also limits your exposure to risk.
Another way to limit the risk in your investments is to have a diversified portfolio. Ensure you have exposure to different asset classes and currencies. According to Modern Portfolio Theory it is rare that all asset classes will go up and down in line with one another, a diversified portfolio allows you to limit the volatility in your investments.
At times of uncertainty financial advice becomes more important than ever, if you are concerned about your finances you should seek that advice. As the hunt for returns becomes more difficult you need to ensure you manage that cost as it will harm your real returns in the same way inflation impacts the value of cash.