Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Nick Green from Unbiased.co.uk - the body that promotes independent financial advice - looks at the potential effect of Brexit on people’s personal finances.
So it is settled – at least, the voting part is. The UK’s exit from the European Union after 43 years is now set to happen. The exit itself won’t happen for at least two years, and may will take longer due to the number of negotiations involved – but the impact is being felt right now.
Moving away from the wider geopolitical implications of a UK outside Europe, let’s take a look at the immediate effect on personal finances.
The Overall Picture
The biggest impact of Brexit has been on the stock market and on the value of the pound. The FTSE fell more than 7 per cent within moments of the London Stock Exchange opening, while sterling fell overnight to a value not seen since 1985.
Investors have been pulling money out of UK assets and will continue to do so, with a knock-on effect on equity markets. The result is that anyone exposed to the stock market (such as pension savers or investors in stocks and shares) are likely to see the value of their assets take a steep dip.
We may also see property prices starting to come down, as the UK (and London especially) is progressively seen as a less advantageous place to live. The outlook for small businesses is uncertain, as most economists have predicted a recession in the wake of Brexit – some saying mild, some severe.
However, Chancellor George Osborne will be doing his best to calm the waters following this result. The Bank of England may hike up interest rates to try and halt the fall in the pound, and may also pump money into the markets to maintain liquidity. The effect on personal finances is hard to assess, but certain broad predictions can be made.
Your Pension
If you have already started drawing your pension and have chosen an annuity, you have made a good call. Your money is no longer exposed to the stock market, so your income is guaranteed for the rest of your life, regardless of what happens in the wider economy.
If you’ve started taking your pension as drawdown, your situation is a little less easy at present. Until the markets have settled down, you should try and reduce the amount you draw from your pension as much as practicable. Drawing money out of your pot during times of negative growth can reduce its value disproportionately, so it becomes harder to make up the losses when markets rise again.
If you are currently saving into your pension, the turmoil in the markets may have reduced its value in the short-term. If your retirement was imminent, it may be worth delaying your retirement date to give your pension a chance to recover. If you have not yet bought an annuity you should definitely consult a financial adviser about how best to draw your pension in the wake of Brexit.
There are also concerns that the ‘triple lock’ for state pensions is under threat (this is the guarantee that pensions increase by at least the level of earnings, inflation or 2.5 per cent every year). A poorer economy may put this at risk. Bond yields may also fall, reducing annuity rates – so if you are yet to take out an annuity you may get less annual income for the same money (and you may also have a smaller pension pot as a result of the stock market crash).
If you are still many years away from retiring, this short-term volatility should have less of an impact on the overall value of your pension. If you are making regular contributions you are effectively buying shares, or units in a fund, at a cheaper price so should benefit when markets recover.
Your Investments
If you currently have money invested in the stock market, it will have taken a big hit as a result of the vote. Even bonds have become a poor investment, with the yields of German bonds falling below zero as investors rush for a ‘safe’ option. However, drawing the money out now will only crystallise that loss, so the best option now will be to stay invested and monitor the markets closely. Remember that markets have crashed before and in the long term have always recovered. If you happened to invest in gold, you made an excellent call – its value has soared overnight.
Your Home
The predicted fall in property prices may be good news for first-time buyers trying to get on the property ladder. However, it will be less welcomed by those who have stretched themselves to buy a home only to see its value fall. Furthermore, if the Bank of England raises interest rates to try and shore up the pound, any fall in house prices may be cancelled out by the increase in mortgage rates – which will be bad news for first-time buyers and homeowners alike.
Your Business
If you run a business, take note that you will still be bound by all EU legislation for at least the next two years, if not longer. You also shouldn’t see an immediate loss of the benefits of EU membership, though you may find it harder to attract future funding for your business. It may also become harder to achieve organic growth in the future, if the market is significantly reduced in size. However, this depends on whether or not we remain members of the single market. If single market membership is retained, then EU policies such as the free movement of labour will almost certainly remain in place.
The biggest impact for businesses large and small will be uncertainty and a weak pound. Imports will now be much more expensive. Long term plans will be very difficult to make during the protracted exit process, since no-one even knows how long this will take or what the outcome of negotiations will be. It may be that most businesses will have to ‘wing it’ from financial year to financial year, making and updating plans as they go. This may also take place against the backdrop of less stable financial markets a weaker pound – though a low value of sterling may help exports to some extent.
George Osborne has warned also that taxes may have to rise, affecting businesses and individuals alike.
How to Respond
Despite the warnings of a period of upheaval, it is important to take the long view. The fact that the majority of voters opted for Brexit means that the national mood should now be upbeat at the result, and this may lead to a feelgood factor to counter the gloom in the markets.
The instability now being felt should also settle down soon now that the vote has passed, as investors focus on the UK’s future outside Europe. The group ‘Economists for Brexit’ predicted that the UK’s economy would receive a 4 per cent boost in British currency as a result of leaving the EU, so we will soon find out if they were right.
During any period of uncertainty, expert advice is at its most important. If you are worried about any aspect of your finances and how the Brexit vote may have affected them, talk to a financial adviser. Find your independent and regulated financial adviser at Unbiased using our smart postcode search.
Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com
