How the Chancellor’s statements affect savings & investments

Chancellors’ Budgets outline the government’s plans for raising or lowering taxes for the following financial year. They also cover the government’s plans around other financial decisions such as spending on health, schools, police and other public services.

Should the Budget announce measures that result in interest rates rising, it can be great news for savers looking for a good return on their high-interest savings account. With this in mind, savers and investors should watch the market closely after a Budget statement to see how the financial plans unfold, and how they will affect their finances.
 

Here, we’ll explore how the Chancellors’ Budgets can impact savings and investments, drawing attention to how Budget statements can have a knock-on effect on interest rates rising or falling during a recession. With this knowledge, you’ll know what to look out for in future Budget statements.

 

 

What is the Chancellor’s Statement?

Each year, the Chancellor of the Exchequer delivers the Budget of His Majesty’s Government, also known as the Financial Statement, to the House of Commons. The statement details the current state of the economy, and the tax and spending changes proposed. The Budget statement is one of two statements made every 12 months – one in the autumn, followed by the Spring Statement the following year. 



The first half of the statement typically reviews the nation’s finances and economic situation, while the second discusses proposals for taxation. So, should the country be in economic contraction or downturn, such as facing a recession, this can impact the stock market and interest rates. During a recession, the statement usually cuts spending in areas such as defence and universal credit, and raises taxes for businesses and higher earners.

 

How does the statement impact savings?

How the Chancellor’s statement impacts savings depends on the state of the markets and economy at the time. If the statement increases confidence in the markets, then share prices in the affected sectors should rise – driving profits for both investors and banks.


The Chancellor’s statement can cause significant fluctuations in share price values – so, as an investor, the value of your pension or investment portfolio can increase or drop in value overnight. Whereas, while a high-interest savings account won’t lose its total value overnight, it may lose future earning potential if interest rates were to drop as a result of the statement. With this in mind, you may consider a cash deposit platform like Flagstone, that lets you move your money between several savings accounts and a range of interest rates from across the market.

 

How does the statement impact investments?

When the economy is struggling, like during a recession, you can expect to see lower stock market prices and higher levels of volatility. During the Autumn Statement, it was announced that the capital gains tax allowance would be reduced, affecting those who sell or gift high value items such as assets and shares held outside of an ISA or PEP. 


Should a future Chancellor’s statement draw attention to negative economic growth, investors may choose to focus on protecting their capital by investing cash, rather than seeking returns on higher-risk equities. 

While high-net-worth investors are unlikely to feel as much strain during economic decline, many small investors are likely to be affected by increased tax on dividends and capital gains. As an investor, diversifying your portfolio across a range of assets such as bonds, property, equities and commodities (across different sectors) can help to position your portfolio against potential damage during an economic downturn. 

 

Will a recession affect your pension?

When companies start to feel the strain of a recession and reduced spending, their share prices can often suffer, which can negatively affect the value of your retirement savings. This is because the money you pay into your pension is invested into something called a pension fund. This is essentially a big collection of pension savings that invests into a variety of financial assets, including stocks and shares, government bonds and property. 


When the economy faces financial struggles, the value of these investments often declines which can impact your retirement plans. But if you’re a few years away from retirement, you shouldn’t need to worry as your savings have time to recover. If you continue to contribute to your pension when the market prices have dipped, you may benefit when the market bounces back. 


Retiring sooner rather than later? You may want to consider moving to a pension fund that comprises less risky investments such as government bonds, or push back the date you’re looking to access your pension. Be sure to speak with a financial adviser before coming to a decision. 

 

Is your money safe in a savings account?

If you’re depositing large amounts of money into a savings account, you’ll want to know your cash is protected. You’ll be pleased to know that savings accounts regulated by the Financial Conduct Authority (FCA) are protected up to £85,000 under the Financial Services Compensation Scheme (FSCS). This threshold applies per financial institution, not per savings account. So, if you have two separate accounts held with the same bank, you’d risk losing any savings above £85,000. For security, consider avoiding holding more than that amount with any one bank.


Under the FSCS, if the bank, building society or credit union were to go under or close, you should normally get your savings up to this amount back to you within seven working days – but this can take longer depending on your individual circumstances. Often, claims from other financial products and services can take longer to process.

So, make sure to check that your savings accounts are regulated by the FCA and is also protected under the FSCS, to safeguard your wealth. With this in mind, a cash deposit platform like Flagstone allows you to easily spread your deposits across multiple accounts to maximise your financial protection. 

 

Should you cash in your savings during a recession?

You may assume that cashing in your savings during a recession is wise, but this isn’t always the case. While interest rates may fluctuate during a recession, the total value of your savings account won’t decline in the same way as shares may do. But if you’re looking for a flexible savings option during a recession, an instant access account may suit you best. While instant access accounts often come with a lower interest rate than fixed-term accounts, they offer you the flexibility of being able to withdraw your money as and when you need to without being charged.

 

Should you keep saving and investing during a recession?

Having a savings goal in mind is never a bad idea, even during a recession. In fact, you’re likely to see a higher return on your deposits during a recession, as interest rates tend to rise.


As an investor, you may be tempted to play it safe and sell your investments. But if you keep investing during a recession, you may reap the rewards when the economy bounces back. After all, economic decline is temporary, and history has shown us that the economy does recover. Any loss you see in your investments won’t impact you unless you take the money out of your accounts – in which case you’d never see the gains on those investments when the market improves.

Overall, it’s usually advised to ride out the storm and avoid rushing financial decisions during a recession. If you need support in your decision-making, be sure to discuss your options with your financial adviser.

 

What should you do with your money during a recession?

It’s natural to worry about where to put your money during a recession. After all, a recession is a period of economic decline which can sometimes be detrimental to investments. You may be weighing up whether to keep your money in the stock market, or a savings account. Here are some options to consider:

 

Savings account

There are several types of savings accounts available. Instant access accounts tend to offer lower interest rates than other types, but give you the flexibility to access your money as and when you need it. Whereas a fixed-term savings account will usually offer you a higher interest rate, but you’ll have limited access to your money. During a recession, you’re likely to earn higher interest on your deposits to try and tackle inflation.

Investments

While a negative economy can take its toll on the performance of stocks and shares, this doesn’t mean you can’t invest during a recession. Make sure to diversify your portfolio across a range of assets, as well as different sectors of equity investments to best position your portfolio against risk.

Cash deposit platform

A cash deposit platform like Flagstone gives you access to dozens of banks and hundreds of savings account rates. You can move your deposits across different banks and savings accounts to maximise both interest and FSCS protection. So, should the interest rate drop on one account, you can move your money to another account with ease.

 

Do interest rates rise or fall in a recession?

Interest rates rise and fall based on supply and demand, so if there’s a demand for credit, such as during a recession, interest rates usually rise. Once the market has levelled out again, there tends to be a decrease in the demand for borrowing so interest rates decrease as a result.

 

How does inflation affect your savings?

While inflation often causes interest rates to rise, which can offer you a higher return on your savings, your savings are at risk of losing value in real terms. For example, if inflation averages at 3% for the next five years, what costs you £1,000 in 2023 would cost you £1,159.27 in five years’ time. 

 

How much can you earn from high-interest savings?

How much you can earn from a high-interest savings account depends on several factors, such as the current economy, the type of savings account you choose, and the Bank of England base rate. Looking for the best return on your savings? You can access a selection of interest rates across our market-leading banking panel with just one straightforward application. Our cash deposit platform offers access savings accounts from up to 50+ banks, with exclusive rates so you can watch your funds grow.

 

See how much interest you could be earning with our cash deposits calculator today.

 

This article is not advice. If you would like to receive advice on your savings and investments, consider speaking to a Financial Adviser.

 


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