There are only a few weeks left until the nation goes to the polls on 23 June to decide whether to stay in the European Union (EU) or to leave it, in what has been coined a ‘Brexit’. While the outcome of the vote remains impossible to predict, one thing the polls are discovering is that it is the effect on our wallets that most voters are concerned about.
A survey found that financial concerns would be the number one factor for most voters when deciding how they would vote. “Our research reveals just how much people could be swayed by either campaign group if they are able to communicate effectively how the outcome will benefit or harm household finances,” says Simon McCulloch, director of Comparethemarket.com, which conducted the poll.
So are households going to be thousands of pounds worse off if we vote to leave? Or could a Brexit leave us all a little richer? Here’s everything you need to know about the EU referendum and how it could affect your finances.
A job is fundamental to most people’s financial health. The ‘Remain’ campaign says that leaving the EU could leave three million jobs at risk. These are the jobs that are linked to EU trade. However, the ‘Leave’ campaign says there will be plenty of time to arrange deals to protect those jobs.
Under the rules of the Lisbon Treaty, any country wanting to leave the EU has two years to negotiate a new relationship with the countries within the EU. The Leave campaign says this means it is highly likely that during that time new trade deals would be struck.
“As a major economic power, the UK does have clout in regards to negotiating trade terms,” says Ian Forrest, investment research analyst at The Share Centre.
“There are big EU companies that will be very keen to maintain their current terms with the UK and not have any impediments put in the way of current trade. Some will be lobbying heavily with their own national governments, as well as with Brussels, to make sure relationships continue.”
The majority of economists say a vote to leave the EU would result in a further fall in the value of the pound. Sterling has already fallen this year in the run-up to the referendum. At the time of writing (7 May) £1 = EUR1.26 , down from EUR1.36 on 1 January. Estimates of how far the pound would fall after a leave vote range from 10% to 20%.
A fall for sterling would mean your holidays abroad would get more expensive as your pounds won’t buy you as much foreign currency. But the flip side of this is the UK would become a cheaper holiday destination for foreign tourists, which could boost our own travel industry. “A Leave vote will weaken the pound in the short term against the euro and push up the cost of holidays in the eurozone,” says Ian Hughes, chief executive of specialist market research agency Consumer Intelligence.
“No matter your view on what is right for the UK, it makes sense to buy holiday cash now and avoid losing up to 20% on your euros if you wait until 24 June and find the UK has voted to leave,” he adds.
Andy Scott, economist at foreign currency firm HiFX, says: “The markets are fixated with the UK’s EU referendum as far as sterling is concerned due to numerous bodies and organisations that have warned over the risks of a Brexit. It continues to be a major underlying reason for sterling’s weakness against the dollar this year, whilst every other major currency is currently stronger against the dollar.”
It isn’t just your currency that could be affected if we vote to leave the EU. Your overall holiday costs could go up, too.
Leaving the EU would mean we might not have European Health Insurance Cards (EHICs) anymore - they entitle British citizens to free healthcare in many EU countries. So you might need to pay more for travel insurance.
However, EHICs work within the European Economic Area (or ‘EEA’), not just the EU itself. If the UK pulls out of the EU but remains part of the EEA, the use of EHICs may not be affected in the long term, as it isn’t with countries that are outside of the EU but are part of the EEA, such as Iceland and Norway. However, this would depend on the willingness of the EU and its member states to acknowledge the continued validity of EHICs, and this is not guaranteed.
A Brexit could also affect UK airlines that currently benefit from the EU’s Open Skies agreement, which allows them to operate anywhere within the EU without restrictions on pricing, capacity or frequency. A vote to leave could see our airlines lose these benefits and fares rise as a result. But the two-year exit period imposed by the Lisbon Treaty could give the airlines time to renegotiate deals.
The European Common Aviation Area could offer a route for UK airlines to access the single aviation market, post-Brexit, in the same way as countries such as Norway currently do. But it certainly seems fair to say that the UK’s status with respect to the single aviation market, in the event that it were to leave the EU, is at least uncertain.
Inflation and interest rates
A fall in sterling after a Brexit would have a far-reaching effect on our finances, thanks to inflation. A weak pound would mean foreign goods become more expensive, which could push up inflation. Not only could this mean the cost of living would get higher, it could also affect your debts. “If the currency weakened significantly and inflation were to rise it could result in consequences for mortgage borrowers through a need to increase interest rates sooner than previously anticipated,” says David Hollingworth, a mortgage broker at London & Country Mortgages.
This could mean that your monthly mortgage costs rise if you are on a tracker deal or your lender’s standard variable rate. Plus you could find mortgage rates have risen across the board when you start shopping around for a new deal.
While a rise in interest rates would be bad news for borrowers, it could be the light at the end of a very long, dark tunnel for savers. An increase in interest rates could see savers finally making a decent return on their nest eggs after years of pitifully low savings rates.
A Brexit isn’t expected to put savers money at risk as the Financial Services Compensation Scheme protects up to £75,000 deposited with UK-licensed banks. However, British savers benefit from a similar guarantee on money held in EU banks; this could change if we were to leave.
Whether we vote to leave or remain, many experts say house prices shouldn’t be hit too hard. But in the run-up to the referendum the market might slow.
“Uncertainty could result in some movers delaying their decision,” says Mr Hollingworth. “However, in the longer term there will remain a need for buying and selling of houses so the market will no doubt adapt quickly to whatever the referendum result turns out to be.”
Some experts have voiced concerns that a Brexit could result in a slump in the housing market as foreign buyers go elsewhere, but this is unlikely according to Dominic Agace, chief executive of Winkworth estate agents.
“The UK and London, in particular, has always had a draw for foreign investment, not only from Europe but much further afield, and I would expect this to continue whatever the outcome, especially as people come for many reasons including schools and the lifestyle,” he says. Plus a weaker pound could encourage foreign buyers.
The AA has warned that a break from the EU could cause family fuel bills to rise by £500 a year as petrol prices may rise as much as 18.7p a litre. That would add up to a £497 increase in annual petrol costs for a two-car family who refuel twice a month.
Edmund King, AA president, says: “Financial reports suggest leaving the EU could lead to a sharp fall in the value of the pound which in turn could hit pump prices within days. The instability of the pound could mean a significant hike in petrol costs.”
However, the RAC disagrees with the AA on what could happen to petrol prices. “The impact on fuel prices of Britain exiting the Euro is not likely to be as dramatic as motorists might be led to think,” says RAC fuel spokesman Simon Williams.
The RAC calculates that a 20% fall in the value of the pound would only add £2 to the cost of filling up the average 55-litre petrol car. That would result in a two-car household who refuel twice a month spending £232 each month – up from £224.
Mr Williams also points out that currency fluctuations are not the only things that can affect petrol prices. “While the strength of the pound is a significant factor in the price motorists pay for petrol and diesel due to wholesale fuel being traded in dollars, the oil price is currently a greater influence.”
Both the AA and the RAC emphasised that they have no view on the UK’s membership of the EU.
Many experts fear a Brexit would cause stock market turmoil due to the age-old adage that markets hate uncertainty. So many investors are sitting in cash ahead of the EU referendum.
“A vote in favour of leaving the EU is likely to be more disruptive to financial markets in the short term, simply because it is a change to the status quo, and markets don’t like what they perceive to be the unknown,” says Danny Cox, spokesperson for Hargreaves Lansdown.
“However, investors should not try to reflect a view of the outcome of the EU referendum on their investment portfolios. This is because the outcome of the vote is highly uncertain, as is the effect either result will have on financial markets. For instance, estimates of the effect of a Brexit on the UK economy range from -10% to +10%.”
Ben Yearsley, investment director at Wealth Club, says: “There are two things to consider: stock markets and currency. If we leave the EU, a big collapse in sterling will boost your overseas investments. If we stay, the UK stock market will probably be fine but sterling will bounce and your overseas assets will drop in value. Either way, you’ll have one offsetting the other.”
However, Mr Cox says weaker sterling following a Brexit could benefit UK stock market investors too. “If the pound weakens on the result of a vote to leave Europe, this would boost the sterling value of the international revenue streams of many FTSE 100 companies, which should be positive for them,” he says.
If you are investing wisely and have a portfolio that is diversified across geographical regions, the referendum shouldn’t have a huge impact on your overall portfolio. A wise move ahead of the referendum may be to take a look at your investments and rebalance your portfolio so that you have a good mix of assets and geographic regions to protect you from any major shocks. This is especially important this year as Brexit isn’t the only thing that could cause volatility in the markets.
“Brexit is less of a concern than the US presidential election,” says Richard Woolnough, a fund manager at M&G. “Although Brexit fears are likely to cause volatility, investors should focus more on the possibility of Donald Trump becoming the next US president.”
The state pension rate is decided by the UK government, so is unlikely to be affected regardless of the outcome of the vote. The state pension is also protected by the ‘triple lock system’, which means it rises every year by the highest of price inflation, earnings growth or 2.5%. So if inflation was to rise after a leave vote, the state pension would probably also rise to reflect it.
Personal pensions that are invested in the stock market could face the same market turbulence as wider investments in the run-up to the referendum, but in the long term things should settle down.
“In reality, the economy and financial markets will continue after the EU referendum, no matter what the result,” says Mr Cox. “After the vote, investors will still have the same need to invest for retirement. They should not let the referendum distract from their long-term goals. As ever, maintaining a balanced and diversified portfolio is a good way of lessening the effect of any short-term volatility.”