Britain’s decision in June’s referendum to leave the EU has created a lot of uncertainty in both political and economic terms.
Even now, several months later, most of us are little wiser about what form Brexit will take, let alone when it will actually happen. Indications from the Conservatives at their October party conference were that the UK would probably leave the EU in 2019.
But the news that MPs look likely to get a vote on when notification to leave, through Article 50, is issued means that there be to more delays.
Political manoeuvring aside, though, what does the referendum result and the prospect of Brexit mean for savers and investors – particularly those who are about to retire and who need to make a decision about how to use their pension savings to provide an income in their later years?
The impact so far
The Brexit decision has already had a significant effect on the investment landscape. The most immediate economic consequence of the June vote was a fall in the value of the pound against major currencies such as the euro and the dollar, and sterling has suffered further losses in recent week.
Because a lot of the biggest companies listed on the London stock market generate a large proportion of their earnings from overseas activities, sterling’s weakness has given share prices a considerable boost, with the FTSE 100 index of leading shares having risen substantially in the months following the referendum.
But the pound’s weakness means that the goods we import into the UK, such as food and fuel, will become more expensive: this appears already to be feeding into higher levels of inflation.
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Bank of England action
As it had promised during the referendum campaign, the Bank of England took steps in August to protect the UK economy from any potentially damaging effects of the Brexit vote.
The Bank cut interest rates from 0.5% to 0.25% in a bid to encourage commercial banks to lend to businesses and consumers and thus reduce the chances of a downturn. A new programme of quantitative easing (QE) was also introduced with the aim of pumping more money into the banking system and therefore boosting demand.
What this means for your money
The most immediate result of the Bank’s actions is that the rates paid on savings accounts have fallen even further, after several years of very poor returns. It has now become even more difficult to find a deposit account that pays enough to offset the impact of tax and inflation – particularly given that rises in the latter are forecast.
Lower interest rates in the economy have also helped to depress annuity rates to a greater degree over recent weeks: the guaranteed income that can be generated from an annuity is now about as low as it has ever been, with no sign of the situation changing in the near future.
Paltry savings and annuity rates mean that the alternatives – primarily, investing in assets such as shares, bonds and even buy-to-let property – have become even more appealing by comparison.
Are you ready to change the way you save?
Because of the uncertainty that still surrounds Brexit – and which is liable to do so for some time yet – it is impossible to predict how the likes of annuity rates or share prices will change in the short term.
Investing in the stock market or housing will give your money the chance to grow, but there is also a degree of risk: a slump in share or property prices could mean you lose money.
One more thing to bear in mind is that previous rounds of QE, both in Britain and the US, have coincided with rise in share prices: this is thought by some analysts to be the result of the money pumped into the economy by QE being used to invest in companies.
If this were to be the case again, it would offer another reason to invest rather than save or put money into an annuity.
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