Brexit: Personal finance implications
Two months on from the referendum decision for the UK to leave the European Union, it is clear that it will still be some considerable time before the real impact of this decision will be known. However, we can begin to assess the initial effects of the Brexit decision and the likely longer-term implications for personal finance.
Savings and investments
While the initial shock of the ‘Leave’ decision caused some panic (the UK FTSE 100 index of leading company shares fell 7% on opening the day after the vote), markets in general have recovered to well above pre-Brexit levels.
Despite this rally and until we have some clarity, which may take several years, we will continue to see market volatility as opinions and views vary, and negotiations with EU and non-EU countries commence and (hopefully) conclude.
Any TV pictures of negotiators emerging bleary-eyed having failed to strike an agreement after another all-night sitting are unlikely to be well received by markets. Therefore, the management of investment funds has never been more important and investors should be regularly reviewing their portfolios together with their investment managers and financial advisers to ensure they have the appropriate structure.
In an effort to stimulate the economy we have already seen a cut in interest rates and further government quantitative easing measures. The effect of this has also been to reduce gilt yields which are now likely to remain at low levels for a sustained period.
Low gilt yields have a detrimental impact on annuity rates and the funding of defined benefit/final salary pension schemes.
While annuities will still be bought by those needing a guaranteed income, lower rates will push more people towards using the new rules offering greater pension flexibility to access funds.
With investment markets at perhaps surprisingly high levels and potential volatility ahead, one should be reviewing asset allocation and possibly increasing cash positions if a pension fund withdrawal is planned in the short-term.
Borrowing, interest rates and currency
Since Brexit it is now clear that interest rates are on the way down and zero rates are now a distinct possibility. Obtaining a rate of return above inflation is not possible from cash deposits and therefore one needs to look elsewhere, which undoubtedly means taking on more risk.
Another negative of Brexit for individuals has been the fall in value of sterling. While this helps exporters, it will lead to increasing import costs which can stoke inflation and, for those holidaying abroad, less foreign currency for their pounds.
Lower interest rates do help buyers of property, and mortgage rates have never been more attractive.
In the very short-term there have been no changes to the UK tax system and no need for an Emergency Budget. However, the Autumn Statement later this year will be the first opportunity for the new government to show its hand.
The former Chancellor was instrumental in the introduction of the new Lifetime ISA and seen to favour the ISA concept of saving over the traditional pension route. Pre-Brexit we had seen massive changes to the pension system, but will further changes now materialise?
It remains to be seen what effect a new Prime Minister and Chancellor will have on future economic policy but it could be that we are looking at a different savings landscape by the end of the year.
It is clear that the full effect of leaving the EU will not be known for some considerable time but we already have some clarity: a change in government leadership, a cut in interest rates, more quantitative easing measures, a fall in the value of sterling and volatile investment markets.
For the individual, the active management of cash, borrowings, investments and pension funds has never been more important and everyone should be taking professional advice to ensure they are taking the most appropriate action.
About the author
James is responsible for advising Investec Wealth & Investment clients on all aspects of Financial Planning, with a particular emphasis on retirement and inheritance tax planning.