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?
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.”
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.
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.”
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.”