What’s the deal for your personal finances if there’s a no-deal Brexit?

Amid warnings of dire consequences, here’s how to cope if it does become a reality
The pound’s fall since the EU vote has benefited tourists coming to the UK, but not Brits going abroad.
The pound’s fall since the EU vote has benefited tourists coming to the UK, but not Brits going abroad. Photograph: Dan Kitwood/Getty Images

The currency markets have been doing little to allow British holidaymakers to enjoy a relaxing summer. The pound recently slumped to its lowest level against the dollar and the euro so far this year, meaning a break away just got more expensive.

Behind that slump was the growing possibility that talks between London and Brussels will break down over the coming months and the UK risks leaving the EU with no deal in place. Bank of England governor Mark Carney has warned that the prospects of this happening are “uncomfortably high” and should be avoided at all costs. But if that no-deal does, indeed, become a reality, what will be the impact on the rest of our personal finances?

Pensions

An economic upheaval would affect pensions in some ways. Workers could be less able to invest in long-term savings, and there is the possibility that a squeeze on taxes would affect the ability of the government to pay for the pensions “triple lock”, which guarantees a minimum increase in the state pension each year, according to Steve Webb, director of policy at pensions investment company Royal London.

At present, hundreds of thousands of British expat pensioners live in EU countries and get their UK pensions paid and annually uprated as the UK has a reciprocal social security agreement.

“There is a risk that if there was a hostile ending of relationships between the UK and the EU, these reciprocal uprating arrangements could break down, and expat pensioners might miss out on annual upratings. Ministers assure us that a deal will be done. But it’s hard to know what a world of poor inter-governmental relationships would look like post-Brexit,” says Webb.

Rates on annuities – which guarantee an income for life – dropped to record lows when the referendum results came through, and some providers pulled out of the market, although rates are now rising slowly, says Rachel Springall of financial data provider Moneyfacts.

With the prospect of no deal, risk-averse retirees could be wise to invest sooner rather than later, says Moira O’Neill of Interactive Investor, an online trading and investment platform. “If you need income, but can delay buying an annuity for a few years – which might be a good idea, as the rates improve as you get older – look at a drawdown arrangement,” she says.

“Since the pension freedoms were introduced in April 2015, growing numbers of people have opted for drawdown schemes, whereby they can take sums directly out of their pension pot as income, while leaving the rest invested. A no-deal Brexit could give investors a bumpy ride, so those in drawdown should consider not eating into their capital, to allow it to recover.

“It’s best, if you can, to only take the ‘natural yield’ – that’s the actual income earned by the investments. For example, dividends on shares or interest or ‘coupon’ paid by bonds.”

Currency

The slump in the value of sterling earlier this month came as investors looked to protect themselves against the possibility of a collapse in talks, and there have been predictions that the pound will continue to fall in the coming months. Last week, foreign secretary Jeremy Hunt said that a no-deal Brexit could result in a sharp fall in the value of sterling.

“If a no-deal Brexit does become a reality, you’ll struggle to find many who don’t foresee the consequences as being pretty dire. There doesn’t seem to be very many positives, in the short term at least, and the many negatives would almost certainly far outweigh them,” says David Lamb, head of dealing at Fexco Corporate Payments.

Some analysts have a brighter outlook. US investment bank Morgan Stanley says Britain is likely to secure a deal with the EU and that the pound will strengthen by the end of the year.

Savings

The Bank of England gave some long-awaited relief to savers at the beginning of this month when it raised rates above the emergency level introduced after the financial crisis. Mark Carney, however, signalled his willingness to reverse the quarter-point increase in the event of a disorderly Brexit.

“Savers who have their money in cash may see their returns fall … which would be devastating to those who rely on their savings to supplement their income,” adds Springall.

Those with investments in the stock market – through shares or shares-based Isas – could face the prospect of turmoil on the exchanges if there is no deal and companies struggle to cope with the repercussions.

“Many Isa savers associate investments with uncertainty and caution, but too much caution can have a negative impact on your money. And although we’ve seen a small rise in interest rates, keeping your money in cash is just guaranteeing that it loses value,” says O’Neill. “On the other hand, if you put too much of your cash into high-risk options such as stocks and shares, you put yourself at the mercy of market fluctuations – and a no-deal Brexit could mean a big drop in the value of investments.”

Housing market

House-price growth slowed in June to the lowest annual rate in five years, driven by falling prices in London, according to the Office for National Statistics last week.

A few days earlier, estate agent Savills posted an 18% drop in half-year profits and warned that deadlocked negotiations made it difficult to make predictions for the rest of the year.

A no-deal Brexit would be “disastrous”, according to Neal Hudson, housing analyst at Residential Analysts, with the possibility of a crash as a result of rising inflation, job losses and a recession. Others argue that a paralysis of the market is not necessarily a given. “Although we saw some evidence of a reaction from homebuyers after the vote, with a few putting a move on hold or pulling out, it was very short-lived and only affected a small minority.

“In most cases, homeowners have tended to decide not to put everything on hold over a potentially protracted period,” says David Hollingworth of London & County.

He believes that while the uncertainty has led to a slowdown of price growth in some regions, other factors are at play, such as affordability and tighter buy-to-let rules.

He adds: “Currently, low mortgage rates and low unemployment means there is a solid foundation. Of course, there could be speculation around organisations shifting job locations, for example in financial services, which could have a knock on for house prices. But even then, it may be regionalised and limited in scope.”

A varied portfolio

Despite the signs of gloom, Brexit does not have to be a disaster for personal finances, according to O’Neill. Instead, money has to be invested to avoid any turbulence.

“This means spreading your money between UK and overseas investments, plus buying lots of different types of investments, such as company shares, commercial property, government and corporate bonds, plus gold. You can buy funds that specialise in these areas. Funds will pool your money with that of other investors to give exposure to more investments than you could buy by yourself,” she says.

“The alternative is keeping your money in the bank, where it may be safer, but doesn’t have the potential to grow. If you use Brexit as a reason to delay or stop investing, you’ll probably find another reason afterwards. You can always find something that makes you feel nervous about investing.”

Brexit is Least Concerning Issue for Majority of UK Landlords

Almost two-thirds of landlords have no plans to sell their buy-to-let properties over the coming year…

Landlords remain optimistic about the buy-to-let market despite recent regulatory and tax changes, according to the latest Landlord Sentiment Survey by lettings agency Your Move.

In a survey of over 1,000 landlords, more than half (52%) felt positive about current market conditions, with almost two-thirds (64%) stating they were unlikely to sell a buy-to-let property in the next 12 months.

Just 16% expressed negative feelings towards the market, whilst 30% responded to the survey as being “indifferent”.

The poll also revealed that for 83% and 80% respectively, the most important considerations for landlords are the costs of upkeep and property maintenance, and the ability to make a long-term profit.

Brexit was the least pressing issue for landlords, with just 32% expressing concerns towards it, whilst under half (43%) regarded the upcoming tenant fees ban in England & Wales as a potential problem.

“Given the number of regulatory and tax changes in the buy to let market over the last few years, it wouldn’t be surprising if landlords felt some trepidation about the future,” said Martyn Alderton, national lettings director for Your Move and Reeds Rains.

“However, it’s great to see that the landlords we surveyed do, for the most part, remain positive about the future.”

He concluded: “Our research shows the majority of landlords are in it for the long term and that’s important for the well-being of the private rental sector, providing much needed homes for those who cannot yet afford, or do not wish to purchase due to lifestyle choices.”

Rents to Climb by 15% By 2023

Upgraded projections follow a drop in new landlord instructions

Over the next year, rents are due to increase by 2% nationally, due to further drops in the supply pipeline and a rise in tenant demand exerting upward pressure on rental growth.

This trend, reported by the latest survey from the Royal Institution of Chartered Surveyors (RICS), is said to become more impactful in the medium-term, with a cumulative surge of 15% expected by the middle of 2023.

The survey shows that a net balance of 22% of survey respondents reported a drop in new landlord instructions, falling in negative territory for the eighth consecutive quarter.

According to RICS’ chief economist Simon Rubinsohn, the lettings data reflects the impact of recent tax changes on the supply of buy-to-let properties. Commenting on the figures he said:

“The risk, as we have highlighted previously, is that a reduced pipeline of supply will gradually feed through into higher rents in the absence of either a significant uplift in the build-to-rent programme, or government-funded social housing.

“At the present time, there is little evidence that either is likely to make up the shortfall. This augurs ill for those many households for whom owner occupation is either out of reach financially or just not a suitable tenure,” he concluded.

Home equity release may cost pension firms billions

UK pension companies may be harbouring billions of pounds of losses from home equity release loans, according to research seen by the BBC.

Under equity release, homeowners borrow money against their house’s value and don’t repay anything until it’s sold.

That’s fine for the borrower, but there are fears lenders have underestimated how much these loans could cost them.

At least one firm assumes house prices will rise 4.25% a year. If they don’t, firms face losses – or even bailouts.

Pensioners whose firms invest in the loans would be protected through the Financial Services Compensation Scheme (FSCS) which is funded through a levy on the industry meaning losses would be ultimately borne by all pension holders.

Parliament probed insurance rules last year and one MP wants to reinvestigate.

John Mann, MP for Bassetlaw and vice chair of the Treasury Committee, which investigated the market last year, told the BBC: “We need to hold a new hearing, a new session, to go into the issue.” He added: “I think some financial institutions have pushed the boat out too far with this, and that creates a potential systemic risk.”

Parliament’s report was seen as broadly supportive of the industry, focusing on competition and innovation.

Equity release works like this:

  • Borrowers over the age of 55, take out a percentage of the value of the house.
  • They pay nothing; the money is paid back when the borrower dies or moves into care. Interest is added each year or month, and because of compound interest, the loans can grow in size very quickly.
  • Borrowers are safe. The loans come with a guarantee that they won’t have to pay more than the value of the house. Any difference is absorbed by the lender.
  • But the loan can exceed the value of the house it is secured against, especially if borrowers live longer than expected or the value of the house drops, and that threatens some lenders.

‘Bad enough’

The Prudential Regulation Authority (PRA), which oversees the companies offering these loans, says it is considering whether to tighten the rules. But critics say it has been too slow.

“It evokes the global financial crisis, but this is an insurance crisis,” said Kevin Dowd, professor of finance and economics at Durham University and author of the report. “It’s not on the scale of the financial crisis, but it’s bad enough.”

If new rules don’t emerge, house prices continue to rise and there are no surprises for insurers when it comes to people living longer, equity release lenders may never realise these losses.

Image caption Professor Kevin Dowd says poorly priced guarantees could bite insurers

Which is the problem, says Professor Dowd. A property price crash or a period of consistent negative growth would see equity release loans become a loss-maker for their providers. So, says Professor Dowd, equity release providers are gambling that house prices will continue to rise.

‘Prudent Resources’

Just Group, to which borrowers owe more than £6bn of these loans, said last month that a PRA draft “does contain proposals, which if implemented would result in a reduction in Just’s regulatory capital position.” This would mean a smaller financial cushion to absorb losses.

Professor Dowd’s calculations suggest its guarantees could cost it £2bn if accounted for correctly in his view. Just Group declined to comment on his estimate.

It said: “At Just we set aside substantial prudent resources against UK residential property risks. We calculate these on a basis equivalent to a 28% fall in the property market and property prices never rising thereafter which is much stronger than the more severe economic scenarios that the Bank of England prescribes for the banking sector. […] Protecting the guarantees we have made to our policyholders is, and has always been, of paramount importance to Just.”

It declined to comment on the size or nature of these resources, or how they might be affected by a change in the rules.

The PRA watchdog is considering whether to change the rules to stop companies assuming house prices will rise.

Equity release mortgages are increasingly popular as older homeowners seek to top up their retirement funds.

In the three months to the end of June, homeowners aged 55 and above borrowed a record £971m through equity release, according to the Equity Release Council.

Image caption Anne and Chris Lee took out an equity release mortgage,and are covered by a no negative equity guarantee

Case Study: Anne and Chris Lee

They are in their early 60s and borrowed about 30% of the value of their home to finance renovations and help fund their retirement.

Their loan was £112,000, at a rate of 6.78%. It will take just over 10 years for that amount to double.

But they are sitting pretty. And that’s because of the no negative equity guarantee, borne by lenders.

Sharing Professor Dowd’s concerns is Dean Buckner, a former senior technical specialist at the PRA who retired in May. He said progress at his former employer in fixing these loans had been slow. Part of that may be the nature of the regulator and the many roles it must fulfil.

“The regulator is there both to protect firms and to protect the general public,” he said. “The Bank of England has part of its mission statement to protect the good of the people or something like that. I think it’s a horrible failure of regulation and I’m very sorry about that.”

The PRA said in a statement: “Following a review announced in 2015, more robust expectations of firms were published in 2016 and confirmed in 2017. Clearer and more precise tools to determine whether firms are meeting these prudent expectations have been out for public consultation since July 2018.

“They benefit from experience of Solvency II in practice and the collective expertise within the PRA, in which a plurality of views is actively encouraged when determining policy”.

Savers ‘missing out on better rates’

Since Thursday’s rise there has been very little movement in rates, although generally it takes at least a week for any rises to be announced and a month for any of those better returns to take effect.

Tom Adams, of comparison site Savings Champion, said that rather than waiting, many people could get a much better deal by moving off an old deal that might pay about 0.5% in interest, or as little as 0.05%, to one of the better buys.

The leading rates for instant access savings accounts are well over 1% so, for many, simply switching to a new savings account would be more lucrative than hoping the base rate increase is passed on to their existing account.

“This year we have seen competition between the newer challenger banks rather than the big High Street names,” he said.

The reason for this, in part, is that the largest banks, particularly, did not need to attract savers. They had money sloshing around from schemes that allowed them access to cheap funds to lend out.

Challenge for customers

The competition view was echoed by Bank governor Mr Carney, who told BBC’s Today programme on Friday that while competition was not the Bank’s direct responsibility, it had created a better-prepared wicket for this to be played out.

“In order to have competition, you need all of the banks to be healthy,” he said.

“That required a lot of repair post-crisis, and… you need a lot of new banks in the system, so we’ve authorised 40 more banks.”

The City regulator has suggested that a minimum savings rate should be considered for longstanding customers, but a widely held view is that savers need to ditch their loyalty and move their funds around.

However Mick McAteer, director of the Financial Inclusion Centre, said that switching would not benefit many households with squeezed finances.

He said many millions of savers did not have sufficient amounts tucked away for a small rise in interest to make much of an impact.

Even a 1% rise in the savings interest rate would only add 20p a week or so to many people’s savings, he said, which was an “immaterial rise” and one that would do little to encourage people to save more.

Pensions unsafe, say self-employed, as Government pledge stalls

A five million-strong army of self-employed workers has no faith staff pensions are the safest way to save, according to official statistics, as a Government manifesto pledge to ensure the rising tide of freelancers is ready for retirement fails to bear fruit.

Among those who work for themselves just 15pc think paying into an employee pension is the best way to guarantee an income in retirement, Office for National Statistics research covering July 2016 to December 2017 found. This compares with 44pc among those who are employed.

Low trust in workplace savings from the self-employed may be expected given employer pensions are not available to them, the ONS said.

But research from IPSE, a trade body for the self-employed, in May found fewer than one in three (31pc) freelance workers are currently paying into any pension at all. Taken together, the ONS and IPSE figures point to millions being at risk of lacking a decent income in later life, a problem that is growing as the number of self-employed swells.

The Government pledged to tackle the issue of self-employed pensions in its manifesto last May, saying “we will continue to extend auto-enrolment to small employers and make it available to the self-employed”.

But it has still yet to put forward any specific plan to enact this.

Self-employed worker numbers have jumped in recent years from 3.3 million people (12pc of the labour force) in 2001 to 4.8 million (15.1pc of the labour force) in 2017.

Under “automatic enrolment” all employers must pay for a pension on behalf of their staff. The policy is intended to bridge the savings gap that means many people will have little or nothing to live on in old age.

The rules, which were conceived a decade ago, did not include anticipate the boom in self-employed working and stated the self-employed are not required by law to enrol in a workplace pension.

Self-employed workers who plan to rely on the state pension may also be disappointed as their numbers grow.

For every one million people moving from being employed to being self-employed, £2.8bn is lost annually from national insurance contributions, which fund the state pension, according to a report from pensions firm Aegon.

The Taylor Review into working practices, published last July, called on the Government to improve pension provision among the self-employed, including auto-enrolling them into a pension and administering this through HMRC’s tax self-assessment process.

In its response in February, the Government said it would carry out “feasibility work, and will seek to evaluate these interventions and consult on next steps before the end of this parliament”.

The Department for Work and Pensions reiterated its commitment to increasing pension provision among the self-employed in its corporate report, published in June.

“[The DWP plans to] take forward wider work to explore ways of increasing retirement saving among the self-employed, and to engage with stakeholders on the proposals set out in December 2017 to extend coverage and increase contributions in the mid-2020s,” it stated.

The ONS figures suggested self-employed people are considering other provisions for life post-work. Investing in the property for retirement (42pc) was viewed as a much better option, despite property investments generally lacking the same perks as pensions such as government tax-relief and employer contributions.

laura.miller@telegraph.co.uk