Those of us who woke before 6am found ourselves in a political storm. For later risers, though, it was economic chaos.
The pound has plunged to the lowest levels for a generation, billions have been wiped off the FTSE 100 and economic pundits are predicting a slowdown, or even a recession.
This is an assault on one of the politicians’ most praiseworthy groups, the savers.
Those families that have patiently squirrelled away their wages over years of low interest rates now find themselves facing the kind of uncertainty not seen since 2008.
Worse still, the biggest impact will be felt not on wedding funds or holiday savings, but on the most necessary savings of all – pensions.
How Brexit affects savings
There is no doubt that if markets continue as they have today, some savers will be losing a lot of money. But it depends on where you live, and what kind of savings you hold.
Pensions and investments
Pensions are usually invested, so market movement matters a lot. Pension fund managers try to beat the market by anticipating uncertainty, but even though many will have taken into account the risk of Brexit, most apparently did not take it seriously enough.
Savers holding shares may see the most dramatic losses today, but it’s also worth keeping an eye on gilts – government bonds. Pension funds also invest heavily in gilts, which are seen as a very safe investment, and underpin the annuity market. In an environment of ultra-low interest rates, gilt have already been paying out poor returns to savers. If investors flock to gilts, the returns could be even lower. On the other hand, if the Bank of England was forced to raise interest rates, gilt yields could rise.
Stocks and shares ISAs are invested in a similar manner to pensions. Shaun Port, chief investment officer of Nutmeg, a popular investment platform, said fund managers had been trying to protect customers against the Brexit risk since February.
But he added: “We expect to see extreme market volatility and big hits to business confidence. This will have a knock on effect for savers.”
How far this kind of market volatility affects savers depends on what kind of timeframe they are looking at. A saver who needs to cash in their investments this summer may find they have lost a significant chunk of money. On the other hand, someone who invested their pension for the first time today could actually benefit as the market recovers over months, or perhaps years.
Cash
Savers in cash have less to worry about – the Financial Services compensation Scheme protects your cash up to £75,000 in a single account. So they can breathe easy – so long as they’re not planning to use their savings outside of the UK.
The pound has plummeted to a low last seen in 1985 against the dollar. Currency value is a mark of confidence in an economy and the financial institutions behind it. With no clear trade deals on the horizon until October or later, it’s hard to imagine that sterling will strengthen to its pre-Brexit levels any time soon.
This could hurt anyone with plans to move abroad, or someone who now lives off their UK pension overseas.
Like pensions savers invested in gilts, cash savers could also be affected by what happens to interest rates. If the Bank of England is forced to raise them, this could mean more attractive deals on savings account. But if, on the other hand, the Bank of England drops them as it did during the financial crisis, the returns could be worse.
Sit tight or sell out?
Markets tend to have tantrums when they get shock news, and usually the situation calms down as the information is digested. It’s usually not a good idea to panic and pull out of your investments as soon as markets plummet, as that way you’re absolutely guaranteed to make a big loss.
As Andrew Craig, founder of Plain English Finance, puts it: “Today – whatever savings or assets you have that are in sterling are nominally worth about 10% less than they were yesterday. As ever, however, this is in THEORY. Unless you actually sell any of those assets or convert any of your pounds into a foreign currency today, you won’t have actually crystallised this theoretical loss into a ‘real’ one.”
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