The rates reset…where next for UK investors?

Since 2022, global interest rates have been high. This has facilitated flows to cash and liquidity funds. In fact, over the last two years, cash and liquidity funds as a portion of investor allocations for advisers and wealth managers in the UK has grown by a notable 44 per cent¹. As shown below, the increasing allocation to cash is also evidenced by the pronounced growth of cash ISA holdings in recent years.

Total UK household cash ISA deposits (2014-2015)

However, UK interest rates are now on a clear downward path, with the current 4 per cent level being the lowest since March 2023. At UK-based asset manager Aberdeen, its team of economists are forecasting another 0.25 per cent cut in 2025, with a further 1 per cent of cuts in 2026, which would leave the Bank Rate at 2.75 per cent². 

What’s the impact on UK investors?

With inflation expected to stay above 3 per cent in 2025, this poses a problem for advisers and their clients. What should they do with cash allocations as rates come down? As we know, falling rates erode the real income clients can generate from cash, which can be particularly problematic for retirees in the decumulation phase who rely on regular withdrawals. 

This is especially relevant to the UK where the retirement market is significant. Defined contribution (DC) assets have grown by almost 30 per cent since 2019, with the DC market estimated at £1.9tn and £220bn in drawdown at the end of 2023³. With the FCA increasingly focusing on firms demonstrating how their retirement income strategies can meet their clients’ needs⁴, we think now could be an opportune time for advisers to review the options available.

As show above, advisers have multiple retirement strategies available to them. Firms deploying strategies such as ‘Natural yield’, ‘Smoothed funds’, Bespoke’ or the ‘Bucket approach’ may wish to read on.

A viable alternative asset class

For advisers, declining rates create a need to find low-volatility, income-generating solutions that have the potential to preserve capital while delivering a sustainable yield. An asset class that looks well-suited in this respect is investment-grade short-dated credit. It offers the best balance in terms of yield enhancement above cash and stability, which is facilitated by the key features of low credit risk and low duration.

With regards to stability, as shown below, it is worth noting that the BofA 1–3 Year Global Corporate Index recorded just one negative total return over the last 28 calendar years. The year 2022 was one of historic negative returns across fixed income; however, even then, short-dated credit still convincingly outperformed all maturity indices, such as the Bloomberg Global Aggregate – Corporates Index, which was down over 14 per cent⁵. 

Global corporate short-dated index annual total returns (1997–2024)

Introducing Aberdeen’s Short Dated Enhanced Income strategy

In response to client demand, Aberdeen has designed a strategy within the short-dated credit space that is expressly intended to be an all-weather type of ‘step out of cash’ solution. The firm’s active Short Dated Enhanced Income (SDEI) strategy aims to provide a yield enhancement over cash, while limiting volatility and drawdowns.

Crucially, the strategy’s portfolio of global short-dated corporate bonds offers quick access for investors with T+1 settlement. Stability is sought by only investing in high-quality securities that result in at least an average portfolio credit rating of A-, and duration of less than two years. In addition to this, the strategy offers three key differentiating factors that should appeal to advisers:

1) A clear outcome focus. The strategy has been specifically designed to deliver the outcome of yield enhancement over cash, coupled with low volatility and minimal drawdowns. This differs from traditional short-dated credit funds, which are more typically constrained by being managed relative to benchmarks.

2) A blend of money market features and short-dated credit. The strategy will always have a significant allocation to bonds maturing within one year – currently around 35 per cent. Currently, the UK-based asset manager believes this segment offers some of the best risk-adjusted yields. However, this portion, which behaves more like money market assets and exhibits extremely low volatility, is not included in traditional short-dated benchmarks.

3) A genuinely global and diversified approach. Most money market funds today tend to be limited by region-specificity (e.g. sterling or euro). However, the SDEI strategy has a global remit for which it leverages Aberdeen’s global research platform to construct a portfolio of high-quality assets with attractive yields. 

For more information on the Short Dated Enhanced Income strategy, visit its dedicated webpage here.

By Adam Dmochowski, Senior Investment Specialist, Aberdeen Investments

For more information, visit Aberdeen’s website

Footnotes:

1. Financial Clarity, IA Sector Class: Cash and Liquidity June 2025

2. Aberdeen Global Macro Research team forecasts, August 2025

3. Investment Management in the UK 2023-2024: The Investment Association Annual Survey

4. Alpha FMC, Decumulation – it requires a different approach, Independent Report commissioned by Charles Stanley, 2025, p.24

5. Bloomberg, August 2025