Five personal implications of a Brexit

Most independent economic analysis suggests that leaving the EU will be detrimental to the UK economy. Whilst this is not certain, a Brexit would definitely be a leap into the unknown and that ambiguity would likely result in short term economic instability.

Tom Selby, Senior Analyst at AJ Bell looks at how this economic instability could filter down to people’s individual finances:

1. Interest rates
Bank of England Governor Mark Carney has stated he could cut interest rates in the event a vote to leave the EU on 23 June has a marked impact on UK economic activity. This would be good news for mortgage holders who could see their mortgage payments fall but further reduce the already paltry returns available on deposit accounts and cash ISAs.

2. The pound
The value of sterling could slide given the uncertainty caused by the lengthy exit process and subsequent trade negotiations. The pound is already hovering around six-year lows against the dollar in anticipation of a Brexit but could fall further in the event it is confirmed. This would be bad news for holiday makers and would reduce people’s spending power at home and the cost of imported goods would increase.

3. Stock markets
If a Brexit caused the pound to slide, holding overseas stocks or funds could be beneficial, as their value would rise when translated back into pounds. Exporters and big dollar earners would also be likely to do well. Stocks to watch could include Ashtead, Wolseley and BAE Systems, as well as the miners and oils.

4. Bonds
Government bonds or gilts could also wobble in the event of a Leave vote. The UK 10-year Gilt yield has rattled down to just 1.28%, having stood at around 1.4% when Prime Minister David Cameron first announced the referendum – and every time a poll suggests that “Leave” may win, the yield goes lower. This means gilts are doing their job as a safe haven but it further reduces the number of options available to those investors seeking a secure yield on their investments. It could also have disastrous implications for annuity rates which are already at record lows and defined benefit pension schemes which hold gilts to cover future liabilities.

5. Pensions
There have been various claims made, most notably by the Treasury, about the impact Brexit could have on pensions. This is unsurprising given that, in general, older people are more likely to vote.

It may be true that prices will go up in the event of Brexit as sterling depreciates, but nobody can predict for certain by how much as inflation is based on a number of different factors.

For example, the Treasury’s guess that state pensions will be £137 lower in real terms by 2017/18 is based on an assumption that inflation will be 2.2% in the event of a Brexit, significantly higher than the Office for Budget Responsibility’s expectation of 0.6%.

Even if this did happen, pensioners would not be worse off as their pension would rise by at least 2.5% through the triple-lock – they’d just be less better off!

Predictions about the impact on the value of pensioner assets are based on equally heroic assumptions which may or may not prove to be correct. Pensions are a long-term game so, provided you aren’t overly exposed to the stock market as you approach retirement, short-term shocks can be weathered.

However, the state pension situation for current and future expats to the EU would be thrown into doubt by a Leave vote.
UK citizens who retire within the European Economic Area have their state pension payments uprated by at least 2.5% every year through the ‘triple-lock’. This could be worth tens of thousands of pounds over the course of an individual’s retirement.