How a no-deal Brexit would affect your savings

As the chance of leaving the European Union without a deal rises, so does the risk of low rates and deals being pulled.

A no-deal Brexit could mean lower rates and reduced choice for savers, experts warn.

Legislation published earlier this week by the government would allow it to backtrack on key aspects of last year’s Brexit deal with the European Union, throwing trade talks into disarray.

“The big question is what happens if there are further shocks to the economy as a result of Brexit, or indeed Covid,” said Anna Bowes, co-founder of Savings Champion. “Will further shocks see the savings account competition dry up and providers lower the rates on offer to protect their balance sheets?”

Rachel Springall, finance expert at Moneyfacts, said that with talk of negative interest rates and increases to taxation there is little for savers to look forward to in the months to come. 

She advised: “If savers have cash to invest, it is important they consider taking advantage of the most lucrative deals now as there is no guarantee they will be around for long.”

Savings rates have been falling due to uncertainty surrounding Brexit long before Covid-19 further worsened the problem.

The Bank of England cut the base rate twice in March 2020, to a record low level of just 0.1%, where it has since stayed. This rate is factored into the interest that banks pay savers.

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Banks – often slow to pass rate rises on to savers, if at all – were quick to push through the cut to consumers. “Savings rates fell heavily across the board,” said Bowes, but added that there has been some improvement to best-buy rates over the past few weeks.

Competition between the lesser-known challenger banks – especially in the fixed-rate bond market – has driven the rates on offer up, although they are still some way from pre-Covid levels.

Just over a month ago, the best one-year fixed-rate bond paid 0.9%. Today, there are a few bonds paying as much as 1.2%.

Over the longer term, savers can earn even higher fixed rates. The best two-year bonds are paying up to 1.31%, over three years it’s 1.4% and over five years you can earn up to 1.5%.

Financial experts usually recommend households hold up to three months' expenditure in savings as a rainy day fund in case of emergencies.

However, in times of increased uncertainty, as in the case of a no-deal Brexit, they tend to revise this to up to six months’ outgoings.

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This emergency fund is best kept in an instant access or short notice account, so that it can be withdrawn quickly.

These accounts tend to pay lower rates of interest than others that require savers to lock away their cash for longer. However, along with the lower rate comes peace of mind that money will be available as soon as it is needed.

To ensure any savings are safe, savers should check their deposits are held with a financial institution covered by the Financial Services Compensation Scheme (FSCS). This will protect cash pots of up to £85,000 per bank, building society, or other institution, in case they go bust.

After Brexit, the government has said that “UK branches of EU or EEA-based firms will now be covered by the FSCS up to £85,000”, where previously they might have been covered by the EU deposit protection scheme.

Springall said: “Brexit may well not be in the forefront of the mind of the average saver today as they may be more concerned about the influence that the coronavirus has had on the savings landscape, bringing interest rates to record lows. 

“But Brexit could mean some financial brands without a UK banking licence leave the savings market entirely, and that would be bad for competition.”

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