How will Brexit impact your finances
The impact of the UK voting to leave the European Union in the referendum will be considerable. The consequences of a Brexit will not only impact the UK and Europe but also the global economy. The scale of the falls in equity markets and the value of the pound in the days that followed the referendum gave an indication of the potential headwinds we are now facing. While we can't say with absolute certainty the material impacts of the Brexit vote this article sets out the most likely consequences for a range of factors including, jobs, investments, bills, pensions and UK house prices.
How will the referendum result impact jobs in the UK?
Leaving the EU could have a material impact on employment in the future as some multi-national companies consider relocating back inside the EU for business reasons. Part of the attraction of the UK's EU membership was the ease with which companies could trade across the European Union. Freedom of employee movement is also an advantage of EU membership as well as passporting, which is the mechanism that allows businesses to meet one agreed set of business and compliance rules for trading across the whole EU. As mentioned, the relocation issue is likely to primarily affect multi-nationals. As most workers in the UK work for small or medium sized businesses the overall impact should be minimal.
One thing to consider is that any relocation will take a long time to complete as moving a large business is a complicated affair, it’s not something that will happen overnight. However, it is also likely that in the short term companies may cut back or stop recruiting new starters. This will make the job market more competitive as opportunities for employment are reduced.
What should I do?
If you are in a secure job then it would sensible to stay put until things settle down a bit. This is even more important if you have worked for your company for some length of time as leaving could mean forgoing a potential redundancy payment if your job is relocated.
How will a BrexIt affect house prices in the UK?
There is a general feeling that the UK housing market will slow down for a time as people become nervous about taking on new debt during this period of uncertainty. Foreign investors may decide not to invest in the UK housing market and may instead look for investment opportunities within the remaining EU countries. However, foreign investment into residential property is largely focused in the prime central London locations. So certainly in the short term the top end of the market may well see a fall in demand which will negatively impact house prices in this portion of the market. However, bear in mind that the value of the pound has fallen around 10% since the referendum. This means that foreign investors now get 10% more pounds for their foreign currency than they did previously. Or in other words suddenly house prices have become 10% cheaper for foreign investors and that will be an attractive proposition.
Ahead of the referendum vote there was anecdotal evidence from estate agents that the property market was slowing as buying enquiries dried up. At the time this was put down to a multitude of factors including the news stamp duty regime for landlords and the impending referendum. However, in the immediate aftermath of the vote estate agents are not reporting a significant fall in enquiries. There was a lot of speculation from campaigners ahead of the referendum that a Brexit would lead to house prices plummeting by almost 20% as the economy struggled and the cost of borrowing rose. Sadly many young people voted to leave EU so 'that they could get on the property ladder'. However, house prices are influenced by a multitude of factors. In a world where house prices fall and the economy struggles while the cost of credit rises those looking to get on the property ladder could well struggle to get credit and/or lose their jobs which would make owning their home still a pipe dream.
What should I do?
Predicting future house prices is akin to reading tea leaves. If you don't plan to buy or sell a house in the near future then it is not worth worrying about house prices unless you plan to raise funds by remortgaging. If you are contemplating moving house and taking a significant mortgage then you need to be comfortable with how you would pay the mortgage should we enter a recession.
Will interest rates go up or down?
There are suggestions that interest rates may be reduced to combat any uncertainty in the economy. The theory is that if the Bank of England base rate is reduced this makes the cost of credit (including mortgage repayments) cheaper which encourages consumers and businesses to spend more, so boosting the economy. In fact the market is pricing in a 50% chance that the Bank of England will cut interest rates from the current 0.5% in June. If that does happen then the 60% of mortgage borrowers who are on variable rate mortgages could see their monthly mortgage repayments fall.
However there is a fly in the ointment. Where a borrower's variable mortgage rate is not tied directly to the Bank of England base rate, but instead moves at the discretion of the lender, they are unlikely to see lower mortgage rates even if the base rate is cut. This is because banks want to maintain their profit margin given the negative impact a Brexit will have on their businesses. In addition, those looking to borrow money or remortgage may find that mortgage rates go up as lenders look to control lending ahead of an uncertain future.
Long term there is a possibility that if the value of the pound keeps falling that we could see an inflation shock (see next section). In this instance the Bank of England will be inclined to start raising interest rates, if the UK economy can take it.
How will the UK leaving the EU affect my bills and cost of living?
With the value of the pound falling against the dollar and nearly all global currencies, all goods you purchase that have to be imported will now be more expensive. The UK imports a whole range of goods including oil, cars and food. Some of the purchases are discretionary so can be delayed or shelved altogether. However, oil and food are necessary items that will still need to be purchased whatever the cost. Yet it's not just the cost of imported goods that will increase, so too could goods manufactured in the UK. That's because costs of materials imported as part of the manufacturing process will increase and these will be directly passed on to consumers in the form of higher prices. So don't be surprised if the cost of living starts to rise and we see some inflation in the future if the pound does not stabilise.
What should you do?
Delay any major purchases such as a new car and make sure you are buying your food and petrol at the best possible prices.
How will a Brexit impact holidaying?
If you are holidaying abroad then your holiday spending money will not go as far as before the referendum. In fact in the immediate aftermath of the referendum $1,000 would have cost you around £760 as opposed to just £667 ahead of the vote. That's almost £100 more! It's not just your holiday money that has become more expensive but also any hotels or accommodation that you book and pay for in a foreign currency.
What should I do?
If you have not booked a holiday abroad yet then you might consider holidaying in the UK instead. You will not have to exchange any money so, therefore, will not be affected by any sterling fluctuations. Other than that, shop around for the best exchange rates on foreign currency.
How will Brexit affect investments such as shares?
The UK stock market has fallen since the referendum but maybe not as far as many forecasted and has shown signs of a bounce. However, it's early days yet so it pays to still be cautious. The assets that were badly hit during the sell-off were European and UK equities, in particular bank shares. With interest rates set to stay lower for longer in an attempt to stave off a recession banks will struggle to make money on their investments.
In the UK the shares of mid-sized companies (FTSE 250) were hit the worst. This is because these firms tend to be more exposed to the UK economy and operate in cyclical industries (i.e. those industries most exposed to the state of the economy). By contrast assets held that were denominated in a foreign currency, particularly the dollar, performed well has they received a boost from the relative increase in the dollar versus the pound.
Yet despite $2 trillion being wiped from global equity markets in the two days after the referendum not everyone lost money. In fact 80-20 Investor members made money. You can read how 80-20 Investor helped me to make 5.35% in just 2 days as the FTSE 100 fell by 5.62%!
What should I do?
It is always advisable to seek independent financial advice regarding your investments. If, however, you are a DIY investor then you should be able to make some decisions regarding fund switches. If you are holding cash and are worried what might happen in the unlikely event of another financial crises just remember that banks or buildings societies deposits covered by the Financial Services Compensation Scheme (FSCS) are protected up to the value of £85,000 for a single account and £150,000 for a jointly held account.
How will a Brexit affect my pension?
If you are a member of a final salary pension scheme then your pension will not be affected. If you are in receipt of income from an annuity then you will not be affected either as your income is protected under the FSCS. If you are currently investing in a pension through a SIPP then the same suggestions apply as for other stock market investments (see above). Of course if have a pension in drawdown which is invested in the stock market then significant falls may have a material impact on the income that can be generated sustainably. In addition, since the referendum vote a number of insurance companies have cut their annuity rates for new business which means that those about to buy an annuity will now receive less income throughout their retirement.
What should you do?
If you are receiving income by way of pension drawdown then you may consider reducing this drawdown or stopping it altogether for a short period of time. This reinforces why it is better to build a portfolio of investments that produce a natural income stream (i.e dividends) which are not impacted by the daily fluctuations in the value of the funds or shares producing them. In that way you only have to focus on the reliability of this income being paid in the future rather than whether there will be enough of your pension pot left to pay the income level you have become accustomed to.
How will a potential Brexit shape our future?
Clearly a majority of voters in the UK think our future will be brighter outside of the EU. We all hope this will be the case but at present there is a high level of uncertainty as the economy tries to grapple with the complexities of a potential Brexit.
Nobody knows what the future holds but the UK has a strong business base, a willing and skilled workforce and a vibrant trade with all parts of the world which should in the long term create prosperity for the UK.