Brexit: Now is the time to sit tight and take a long-term view
1st July 2016
Many clients have questions and worries over their personal finances because the UK has voted to leave the European Union. The news brings dramatic announcements by the minute it seems, and at the time of typing Boris has just been BREXecuted.
There is a risk of some financial pain but let's assume that Brexit will happen as voted for and remember most of the changes won't happen immediately.
However, anything governed by stock market, currency values and, to a lesser extent interest rates, can change quickly.
If you’re invested in the market via unit trusts, make sure you have a well balanced and diversified spread across the various sectors - UK, North America, Europe, fixed interest, etc.
If you’re investing new money some say this is a time of opportunity especially if markets are lower, but the next few weeks will be volatile as the world adjusts.
Markets historically rise and fall. As always, don’t go near the stock market unless you can afford to lose money and always keep a reserve deposit type account as well.
I’m investing regularly. Is that still OK?
When you are paying in and the market drops, don’t worry – you are getting more for your investment.
Remember the UK has not left the EU yet, and it will be for the next Prime Minister to start the process, and then there will be a two-year period of negotiation so we’re looking at 2018 at least for Brexit to take effect.
What's going to happen to interest rates?
I suspect interest rates will be cut especially following the announcement from Mark Carney, but they can’t go much lower. Mortgage rates are linked to interest rates, so there could be a steady flow of rates under 1 per cent coming out.
Are my savings safe?
UK banks and building societies are required to have much bigger capital reserves now than they did in 2007. Plus there are a variety of new measures in place to prevent savings collapse. For example, they'd try to move the savings to another bank rather than allow it to collapse and pay out.
The deposit protection scheme is run by the UK's Financial Services Compensation Scheme, meaning that savings up to £75,000 with a bank or building society (or banking group) are protected and will remain so, at least for the next couple of years while negotiations to leave are ongoing.
Has my private pension lost money due to the drop in the FTSE?
If your pension is invested in stocks and shares and you were to cash it in today, yes – you'd have less money compared with before the referendum. Take advice!
If your pension isn't being cashed in today, it's just a paper loss so perhaps you should sit tight. The markets move every day. There’s an impact only when you crystallise that by buying or selling.
So the risk in an investment is the same as always. You hope it moves up, you risk it going down, it changes every day and the timing of when you do the transaction is what counts.
What will happen to the state pension?
There was much talk in the EU referendum campaign about the possible impact on the state pension. It wasn't about the pension itself, but a prediction that there would be a huge economic downturn and the state pension would need to be cut.
Any change to the state pension is a question of policy for future governments, but there's nothing definite planned currently.
Will there be changes to my benefits?
The benefits system in the UK is almost entirely governed by the UK Parliament, not Europe (with some exceptions on benefits for non-UK citizens). So benefits are unlikely to be directly impacted by the vote to leave the EU.
So benefits are unlikely to be directly impacted by the vote to leave the EU. However, it's of course possible that a new government will have a different stance on benefits and make changes when it comes in.
Will my consumer rights be affected?
While many consumer rights are based on EU directives, they're enshrined in UK law. So unless the UK Government decides to change the law, these rights will stay the same.
Will we still be in Eurovision?
Although it’s not financial, I couldn't resist answering this question. Eurovision is run by the European Broadcasting Union, not the EU, so there's no change there.
So our key recommendation is that investors seek a review of their investments especially in these difficult times, to ensure they are not exposed to too much risk, or not enough risk!