If you’ve been sensible enough to squirrel away some money into savings, be it for a deposit on your first home, some side cash for a rainy day or, most sensibly of all, a pension, you’re probably thinking and fretting about Brexit.
What will happen when Britain formally leaves the European Union in March 2019 is still unclear. There is no obvious path forward as opinion on what to do next is so divided.
Will there be a second referendum? Will prime minister Theresa May’s deal ever get through parliament? Will the country crash out with no deal? And what will it all mean for the money I’ve so prudently set aside?
First, let’s think about the Bank of England’s base rate, which is currently set at 0.75%. In the event of a chaotic no-deal scenario, a run on the pound is likely. To protect sterling and fend off inflation, the Bank of England would probably hike rates sharply.
However, if there is no shock, perhaps because of some transitional arrangement or a poor deal, the Bank of England may cut interest rates again to stimulate the economy in the event of a slowdown, continuing the years-long pinch on savers.
As the Bank of England put it in its November 2018 Inflation Report: “The Monetary Policy Committee judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
What if you have savings linked to investments in stocks and shares? Well if Brexit does go badly, the stock market will suffer badly, at least in the short term.
The firms exposed most of all to Brexit – those which do a large amount of business in the EU, such as banks – will probably take a big hit.
Much of that hit may well be priced in before the formal Brexit takes place if it is clear there will be no deal, though shares would likely fall further.
On the other hand, if Brexit goes smoothly – a decent deal, for example, that keeps goods, services, and capital flowing freely between Britain and the EU – that could be a boon to the markets, sending share prices up as investors regain confidence.
Another risk is sterling. Should the value of the pound crash after Brexit, and it is already low in anticipation of it, those relying on savings and living outside of Britain will see their incomes fall.
If you are a British pensioner living in Spain, for example, receiving your sterling-denominated pension each month, it will exchange into fewer euros.
Then there are bonds. A lot of pensions and savings accounts are invested in UK government bonds, known as gilts.
Should Brexit get messy, the value of existing UK sovereign debt will fall as gilts become less attractive in correlation with a higher risk of default by the government.
So if you hold any gilts, the value of your savings would fall too should a hard Brexit take its toll.
If Brexit goes really badly, some financial institutions could even close their doors, just like in the 2007-8 financial crisis. That is a major risk to any savings you have deposited.
Under the UK’s Financial Services Compensation Scheme (FSCS), consumer deposits are protected up to a cap of £85,000 per person, so all is not necessarily lost. But amounts over that will be a struggle to claw back.
However, the compensation scheme does protect 100% of a set retirement income, such as an annuity, in the event a financial institution fails. It also protects 100% of the value of life insurance policies that have a savings element to them.
Another risk to your savings from a bad Brexit that triggers an economic slowdown is a tax-hungry government. Savings and pensions are pots of gold to the Treasury – and the chancellor may come raiding if revenues slide after Brexit.
It is going to be a bumpy few months. If you have serious concerns, speak to a financial advisor who will be able to guide you through all of the risks and options available to you.
Source: Yahoo Finance UK