With a year to go until the UK formally leaves the European Union, Moneywise investigates what you can expect and how you can protect your finances as we head out of Europe.
Brexit is officially one year away and the impact it is having, and will continue to have, on our financial lives is filling the pages of our newspapers and TV screens daily.
The ‘leave date’ set by Theresa May is 29 March 2019, with an expected transition period after this to prevent a ‘cliff-edge’ scenario for consumers and businesses. While that may seem some time away, it is important to start thinking about how you can deal with its impact on your finances.
Samantha Seaton, chief executive of spending and saving app Moneyhub, says: “Consumers are still feeling the pressure of rising prices, which have been going up since the EU referendum. While wages’ increases are finally catching up, a lack of clarity around Brexit will leave consumers unsure about the economic outlook. Households should take the opportunity to start thinking about their financial future.”
We look at how you can Brexit-proof your finances in nine key areas.
Brexit has created uncertainty for many UK employees, especially those who are from other EU countries and have chosen to move here to advance a career, or UK nationals who want to work in other European Economic Area countries.
The freedom of movement rules remain in place and there is an outline of how these will apply after Brexit, but nothing has been set in stone yet.
This lack of clarity is also fuelling concerns among employees about workers’ rights, as EU laws are repealed and replaced with UK laws.
While employers will still need to honour the National Minimum Wage and National Living Wage, some benefits for workers enshrined in EU law may be at risk.
Frances O’Grady, general secretary of the TUC, says: “Brits don’t want a Brexit that undermines paid holidays, rest breaks and fair working hours.”
Job security post-Brexit will largely depend on the industry you are in.
Good employers should keep their staff updated on the likely impact of Brexit. If your employer is not telling you what you need to know, be prepared to ask your manager a direct question. Your employer may not know the answer yet, but you can glean a lot from any information it can give you.
Since the Brexit vote in June 2016, sterling has fallen significantly in value against the euro. The pound reached a high of ¤1.42 in October 2015, but at the time of writing on 20 March 2018, it was worth 21% less at ¤1.14, according to currency specialist Moneycorp.
If the trade talks go well between Britain and the EU, there is hope that sterling’s value will start to recover. But if negotiations stall, creating another difficult year for sterling, travellers may find more value by looking further afield for an overseas getaway.
Ian Strafford-Taylor, chief executive of foreign exchange company FairFX, says: “Regardless of your holiday destination, there are plenty of steps to make sure that when you buy currency, you get the very biggest bang for your buck. These include considering exchange rates before you book and tracking rates, so you buy when they’re at their strongest, as well as avoiding buying currency at the airports and being hit with credit and debit card fees.”
Typical transaction costs for using your card abroad are between 2.75% and 2.99%, and you will be charged a non-sterling purchase fee of between 0% and 1.25% on top.
Each time you use an ATM abroad, you can also be charged anything from £1.50 to £2 a time, so it is wise to withdraw larger sums in one go or to get a specialist overseas card that allows fee-free spending and cash withdrawals, according to Nick England, chief executive of travel money firm EasyFX. You should also pay in the local currency rather than pounds whenever you are given the option.
He says: “Paying in sterling seems like a great idea because you know how much you’ll be paying in your own currency and there are no surprises. But don’t be fooled. Choosing to pay in sterling will always be more expensive.”
Other holiday costs are likely to rise because of Brexit, with everything from flights to hold baggage becoming more expensive.
Adam Ewart, chief executive and founder of luggage shipping company Send My Bag, says: “Unfortunately, the fall of the pound means it is now more expensive to travel anywhere outside the UK and not just to Europe. You might have noticed prices creeping up already. Paying for the luxury of sitting next to a friend on an easyJet flight, for your food on a short-distance British Airways journey, and having to pay to keep hold of your hand luggage on Ryanair are just a few of the ancillary costs airlines are passing on to travellers as they prepare to ‘buffer’ Brexit market fluctuations.”
To save money, he recommends you consider a holiday in the UK. “Book early to get the best deals, do not assume an airline’s partner will be cheapest for, say, car hire, and try to travel off-season when costs are lower,” he adds.
Inflation and interest rates
The Consumer Prices Index including owner-occupier housing costs (CPI-H) measure of infl ation hit 3.1% in November 2017, before falling back slightly to 2.5% in February 2018 – the latest fi gure available at the time of writing – but is still well above the 2% target.
Meanwhile, the Bank of England’s Monetary Policy Committee increased the base rate from its historic low of 0.25% to 0.5% in November 2017, and analysts predict another rise as early as May. This is good news for savers, but not for mortgage borrowers.
Alex Neilson, investment manager at wealth manager Investec Click & Invest, explains: “If inflation and the pound take a hit because of the Brexit deal, then the Bank of England will most likely be forced to raise interest rates, which will increase the cost of borrowing for UK consumers.”
Mortgage borrowers who are on their lender’s standard variable rate or are coming to the end of a fixed-term deal should think about how to fix their costs to protect themselves.
Petrol prices have already gone up, thanks to the fall in the value of the pound since the EU referendum.
Oil prices are always quoted in US dollars, so if the pound is weaker against the US dollar, prices at the pumps will rise.
However, things are not as bad as they might have been, says RAC fuel spokesperson Simon Williams.
“Fuel, like oil, is traded in dollars so wholesale petrol and diesel become cheaper the stronger sterling is against the dollar,” he says. “While this is a significant factor, the price of oil tends to be a greater influence. Fortunately, the weaker pound has coincided with a substantial fall in the price of oil, which means a barrel is now much cheaper than it was four years ago. As a result, motorists are paying 10p less a litre for petrol, and around 14p less for diesel, than they were then.”
Low interest rates for 10 years have hit savers hard and the Funding for Lending Scheme, which gave banks access to cheap government money to pass on in loans to small and medium-sized businesses, has done little to help. But that scheme finished at the end of January 2018, so we may see more competition in the savings markets as high-street banks try to boost their balance sheets.
Stuart Law, chief executive of peer-to-peer (P2P) lending firm Assetz Capital, says: “Even with a hike in interest rates, we’re unlikely to see them hit 2% any time soon, meaning high-street savers won’t see a great change in their returns as we don’t expect banks to pass on all the rate rises to savers. This won’t provide much confidence, with people effectively losing money each day when inflation rates are considered.”
Savers need to move their money regularly to make the most of the best rates, while also keeping their money protected under the Financial Services Compensation Scheme, which covers up to £85,000 deposited with each institution.
However, you can use your savings in a different way if you have a mortgage.
Matthew Tansley, chief executive of mortgage advice website Propillo.com, says: “Your savings hate inflation. One way to get the most out of them is by using an offset mortgage. These special mortgages come with linked savings accounts where you can deposit spare cash. Any money in the savings account is used to reduce the amount of interest payable on your mortgage.”
For investors concerned about Brexit’s impact, moving your money away from companies exposed to issues surrounding Brexit could be a good plan.
Angus Dent, chief executive at P2P business lending firm ArchOver, says: “If sterling takes a dive against the euro, supply side costs could soar, with serious knock-on effects for UK businesses. You can minimise your exposure by staying aware of how closely your investments are tied to UK-EU relations.
“In the current climate, over half of UK investors (53%) associate investments with uncertainty and caution, but too much caution can have a negative impact on your money. On the other hand, if you put too much of your cash into high-risk options such as stocks and shares, you put yourself at the mercy of market fluctuations.
“Brexit need not be a disaster for investors – they just need to make sure that money is invested wisely to protect it from any unexpected turbulence.”
While Brexit may drive some investment decisions, it should not be the only factor. A solid approach to financial planning and diversification of your portfolio is essential, no matter what economic risks arise.
Ben Simpson, chief executive of Menzies Wealth Management, says: “Brexit is not without risk, but it is simply one of many issues that should be considered when looking holistically at financial planning. Start with the end in mind and understand what you are trying to achieve before addressing the specific risk or otherwise posed by Brexit.”
Brexit uncertainty has led to a slowdown in the UK housing market, as people prefer to wait and see what will happen rather than climb on to the housing ladder.
Jason Harris-Cohen, founder of professional house-buying firm Open Property Group, says: “At the moment, it’s a buyers’ market and the gap between asking price and agreed sale price has widened.
“If you want to buy now, you can take advantage of the lower prices, but as a seller you may feel like you’re in limbo. You can put your property on the market, knowing that you may get a lower offer or that your house may get stuck on the market or you can wait until the terms around Brexit have been confirmed before making a decision.”
Home buyers looking to undertake home improvements should also act sooner rather than later.
Sarah Gillbe, residential property specialist at Setfords Solicitors, says: “It is likely that the cost of goods for building services will go up. If you are planning any work, get it booked in and paid for as soon as possible.”
If you have a defined contribution pension, which is linked with investments, Brexit’s impact on the markets will automatically affect your retirement fund, but don’t make any knee-jerk decisions.
Michael Cotter, financial services lawyer at Setfords Solicitors, says: “The key is not to panic and be sucked in by those who wish to prey on the current uncertainty. As matters stand, everything is performing as well as it was and/or better. Remember prior to Brexit, talks of ‘financial Armageddon were banded about but, as of today, the sun is still shining.”
The UK has underperformed recently compared to other major stock markets, says Nigel Pullen, financial planning unit manager at advice firm Wesleyan, so if you are heavily invested in the UK, look to diversify your pension pot to make the most of better performing markets overseas.
If you have any concerns about your pension – or your finances in general – speak to an independent financial adviser (IFA) for advice on what you can do to improve your financial position, no matter what the outcome of Brexit. To find an adviser, visit Moneywise.co.uk/find-an-ifa.
Michael Cotter adds: “Ask the adviser for a review of your portfolio and try not to worry about second-guessing too much – politicians across Europe are still struggling to work out what may lie ahead.”