The economic impacts of Brexit and the pandemic make reassessing your finances an important exercise
You know the story by now; we’re living in unusual times.
Whether its questions surrounding when we can return to the office, when we can freely travel abroad, or even when we can get in a taxi without first putting on a mask…
Uncertainty has essentially become the new normal, and this is no less true in the area of our personal finances.
Even if we avoid the risk of a repeat of last year’s economic disruption as a result of yet further nationwide lockdowns, the damage the pandemic has already done to our economy will almost certainly trickle down to influence our long-term spending and savings habits.
The pandemic is not the only issue to which our finances our exposed, either. There are also the evolving repercussions of our vote to leave the European Union, the rising threat of structural inflation and the potential for sharply increasing interest rates. We are also potentially entering an era of inter-generational wealth transfer the likes of which have never been seen before.
It all makes for sobering reading and highlights why now, more than ever, is a good time to review how our investments have performed and how they are positioned for the coming years; a ‘wealth health’ check, if you like.
Here, we take a look at these areas of risk in more detail:
The ongoing pandemic
Beginning with the pandemic and, while the bulk of restrictions were lifted from the 19th July, we are by no means out of the woods yet.
In fact, in just the week before we formally “exited lockdown” we learned that two of our most senior political figures had been forced into self-isolation and the chief medical adviser for NHS Test and Trace has warned
, the risk of future lockdowns in the UK remains very real. ¹
But even if these don’t come to pass, it’s critical to remember that this isn’t just a UK issue; it’s a global one. Earlier this month, Japan declared yet another State of Emergency just weeks before its Olympics began, and many other nations worldwide remain in lockdown with cases continuing to surge.
The point is that, by way of a portfolio approach through a fund manager—be it in equities, bonds, or property—the vast majority of UK savers will have exposure to investments located around the world. And, as we saw to devastating effect last year, the economic impact of the pandemic can be huge for both countries and the corporations operating within them.
It means that, even if the UK avoids further lockdowns and continues on the road to recovery, it may well be worth speaking with your wealth manager to find out where and how you’re investments are exposed and—perhaps most importantly—whether that remains right for you and whether you’re still comfortable with that.
The impact of the UK’s economic recovery
Ironically, another key risk to UK savers is that of economic recovery.
Regardless of one’s opinion on how the Government has handled Covid-19, one objective truth is that it has cost the UK a lot of money.
There are two factors for savers to consider here.
The first is the direct cost to the Government of the pandemic.
Whether it’s through furlough schemes, loans for the self-employed, bounce-back loans for businesses, or any of the many other support measures the Chancellor has rolled out, HMRC has spent many billions of pounds on fighting coronavirus and protecting the economy.
In fact, from April 2020 to 2021, it borrowed a total of £299 billion ²—the highest figure since records began just after the end of WWII. What’s more, it expects to borrow another £200 billion or more in the current financial year.²
This money doesn’t come from thin air, and the UK Government will need to find ways of clawing it back, either through reduced expenditure on public services and welfare, or through higher taxes. One way or another, we are all going to be impacted.
Chancellor Rishi Sunak has already highlighted that tax increases will be required for businesses and workers to repair public finances, even going so far as to state the following in his latest Budget:
“It’s going to take this country, and the whole world, a long time to recover from this extraordinary economic situation.”
Of course, it remains to be seen exactly how this will play out—though Sunak’s pledge to eschew the normal annual increase to our personal allowances until at least 2026 is perhaps a sign of things to come.³
While we wait, however, another important factor to consider is inflation.
The rate at which prices are increasing across the UK hit 2.5% in June, surpassing City expectations and, most importantly, the Bank of England’s target rate.
Almost all commentators agree that the jump essentially stems from the fact the UK economy has moved from total stagnation to recovery, very quickly—after all, many of us have been spending much more recently.
But what they do remain divided on, is whether this will result in a period of hyper-inflation like we saw in the nineteen seventies, or whether rates will temporarily rise before petering out to “normal” levels by next year.
Again, in the absence of a crystal ball, the reality is currently unclear.
What is clear, is that the risk of tax increases and inflation over a sustained period could have a major impact on disposable income. As such, savers may do well to analyse their current investing and spending habits and consider whether some adjustment will be needed to allow for future financial flexibility.
The risks beyond Covid-19
Covid-19 may have stolen headlines over the past 18 months, but it does not change the fact that there are many other ongoing issues that savers will need to plan for over coming years.
Of course, we can’t cover them all here. But two of the most important ones are Brexit and the imminent Great Wealth Transfer.
Beginning with Brexit, and—thanks to a trade deal agreed at the very last minute in December—the UK has now made its final break from the European Union. Unfortunately, this almost certainly marks the start rather than the end of the large and far-reaching impacts for savers.
Everything from property prices to mortgages, loans and savings rates (not to mention others) are likely to be influenced or even dictated by UK independence over the coming years.
Exactly how remains to be seen—especially given the impact of the pandemic are likely to be more meaningful over the short-term.
So, the best thing savers planning for the long-term can do now is to work with their wealth manager or financial adviser to ensure their investments are as well-protected as possible against the likely outcomes.
Speaking of long-term financial planning, another factor that should be on the mind of savers is the fact that Brits are expected to pass an enormous £5.5 trillion between generations over the next four decades, much of it derived from increased property wealth.
It’s being called the Great Wealth Transfer and this period signifies an unprecedented opportunity for British savers to pass on more wealth than ever to their families. But to make the most of this opportunity, the inter-generational transfer of wealth must be carefully handled.
If it isn’t, then it’s highly likely that families will end up handing more of their hard-earned savings to the taxman than they need to in Inheritance Tax (IHT). In fact, a lack of planning is part of the reason why the average UK IHT bill currently sits so high, at £179,000 per deceased estate.
Given the complex rules surrounding IHT, UK savers should seek out the expert advice of a wealth manager or financial adviser to ensure their family legacy is handled in the most tax-efficient way possible.
Taking the time out
Whether we’re in the midst of a “new normal” or not, our wealth is currently exposed to a wide variety of significant macro-economic risks. Taking the time out to perform a wealth health check with the support of an experienced wealth manager could be critical to preserving our hard-earned savings for the future.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.