Amid rising uncertainty for investors, one thing looks increasingly likely — the UK is heading for a botched Brexit. If Parliament votes down the “withdrawal agreement” next week, as many expect, the political system will go into a tailspin — but what about markets?

The consequences UK investors could have to contend with include a second referendum, a general election, crashing out of the EU with “no deal”, or even no Brexit at all. The relative likelihood of these events will be debated elsewhere on FT.com. Here, we concentrate on ramifications for your money and investments.

How to galvanise your family finances through Brexit and beyond will be influenced by your age — whether you are accumulating or decumulating wealth — plus the impact of inter-generational financial planning. As we prepare for what could be a rollercoaster ride, FT Money highlights what to consider in the year ahead.

Investment outlook

Investors have contended with Brexit headwinds buffeting sterling and domestic-facing UK stocks since the 2016 referendum, but now rising interest rates and the end of easy money are also whistling through global markets.

The currency markets will bear the immediate impact of any negative Brexit news. Sterling has kept a fairly tight range against the dollar since mid-November, sliding to its weakest point for 18 months on Tuesday after the government was forced to publish its legal advice on Brexit.

The options market— which enables investors to hedge against or profit from big currency swings — shows sterling has the highest level of three-month implied volatility since the referendum as the key Commons vote approaches.

For investors, “Brexit is all about currencies,” says Darius McDermott, managing director at Chelsea Financial Services. If the UK has a bad Brexit, he says, the pound is likely to fall further. In that case, stocks and funds that generate the majority of their earnings overseas will be boosted, as the currency effect is translated back into sterling.

For this reason, sterling’s pain can be the FTSE 100’s gain as its constituents generate so much of their income outside the UK, compared to the domestic-facing FTSE 250 index.

Yet away from the noise of Brexit, investors need to be aware of seismic shifts in global markets. This week, the FTSE 100 was trading at a two-year low with 31 firms trading on a forward price/earnings ratio for 2019 of less than 10 times, and 38 of the index’s members offering a dividend yield of more than 5 per cent next year, according to analysts’ consensus forecasts.

“Assets have risen on a tide of cheap money and that’s now being taken away,” says Russ Mould, investment director at broker AJ Bell. “The big theme for next year and beyond will be liquidity and central banks.”

Those approaching retirement will have to rely on income generated by their portfolio for far longer than in the past, as fewer individuals now buy an annuity. That means they will need to generate both growth and income.

“Do not ignore the UK market,” warns Jason Hollands, managing director at Tilney Group, a wealth manager. “It remains very important for dividends and the majority of those dividends are coming from global companies that are not a play on the UK economy.”

The UK equity income sector has been unloved in 2018, with the average fund in the sector losing 7 per cent in the year to date. But funds including Schroder Income, the best performing in the sector over three years, still generate healthy income streams, and recent market falls have also boosted the dividend yields on FTSE 100 stocks.

Of course, some big dividend payers — such as UK housebuilders — would be likely to see sharp share price falls in the event of a bad Brexit. But dividend cover (the ratio of net profits to dividend payouts) is expected to improve across the FTSE 100 next year to 1.74 times, the best ratio seen since 2014 according to Mr Mould.

Longevity risk

Experts say that those approaching retirement or seeking income from their investments can no longer follow the adage of holding their age in bonds, in terms of portfolio weightings, and should not discount equity income funds either.

“It used to be the case that the older you got, the more you put in bonds,” says Mr Hollands. “But that was when most people would buy an annuity and convert their capital into an income for life. Bonds also used to yield a lot more than they do today.”

Bonds have already proved volatile this year amid rising interest rates and the return of inflation in the US and UK, and more of the same could further dent their appeal. Interest rate rises hurt the prices of long-dated bonds most severely and rising inflation erodes the real income investors receive on fixed-income products.

“We often talk about fund managers beating an index, but in the real world, investors want a return that’s better than cash and inflation,” Mr Hollands says.

The Bank of England has warned that a disorderly Brexit could cause interest rates to hit 5.5 per cent and inflation to jump to 6.5 per cent, although governor Mark Carney has stressed this is a worst-case scenario rather than a forecast.

Assuming rates and inflation both rise, savers and investors with large cash balances need to be on their guard. Sarah Coles, personal finance expert at Hargreaves Lansdown, says the best strategy to avoid having your cash eroded by inflation is to have a buffer of three to six months’ worth of cash in the highest easy access account you can find. After that, any money needed within the next five years should be fixed “for whatever period best suits your own circumstances”. After that period, it is almost certainly worth investing the money.

Similarly, taking a fixed level of income from a bond-heavy portfolio might give you a predictable amount of money today, but if the dividends and capital aren’t growing then your real income in retirement will be eroded. Yet bonds remain lower risk, in general, than equities.

High-yield and corporate bonds carry higher levels of risk, but strategic bond funds could be a good option for lower-risk income investors, with the average fund in the sector yielding 2.8 per cent according to Morningstar. The best performing over 10 years is Royal London Sterling Extra Yield Bond, which has returned 190 per cent to investors over that period. Over five years, Royal London Ethical Bond and Baillie Gifford Strategic Bond both feature in the top 10.

Time on your side

Younger investors should be less concerned by the consequences of Brexit as they have a much longer-term investment horizon, and should consider some exposure to riskier assets including emerging markets, which carry the potential for further growth and offer diversification.

Over the past 10 years, the MSCI emerging markets index has delivered a total return of 192 per cent, compared to a FTSE All Share return of 170 per cent. But the threat of a trade war between the US and China, set against the backdrop of a strengthening dollar, meant the sector entered bear market territory in 2018.

In the short term, emerging markets are likely to remain volatile. But over the long term, many investors believe they could deliver better capital growth than developed market equities.

“Long-term investors may like to take advantage of cheaper emerging market shares, but they may have to be patient for the rewards,” says Mr McDermott, who rates Fidelity Asia Pacific Opportunities and Lazard Emerging Markets as two funds to watch. Mr Mould agrees. “There are some great yields in Asia that are under-appreciated and a lot of good governance stories [among Asian companies].”

In times of crisis, many investors want to hold gold. According to the 2018 Legg Mason Global Investment Survey a quarter of UK investors view gold as the best investment opportunity over the next 12 months. However, the price of the yellow metal fell by about 5 per cent in 2018.

“Older generations have a stronger disposition towards buying gold because they have lived through extreme market corrections,” says Haig Bathgate, head of portfolio management at 7IM. For younger investors, he says gold is unlikely to outperform a good portfolio of equities that are compounding growth through reinvested dividends.

Younger investors need to be aware that as well as being more volatile, the next decade could prove decidedly less fruitful in terms of returns.

“Given the 10 years we’ve just had, you have to take into account the risk of lower returns from here,” says Mr Mould.

As investors monitor the effect this could have on their retirement funds, the answer will lie in a combination of saving more today, spending less in retirement, or working for longer.

Generation game

Advisers report that with growing political uncertainty, people are putting inheritance planning at the top of their to-do lists in case the rules change.

“While the outcome of Brexit is uncertain, we all know that by not completing inheritance tax planning your loved ones will receive significantly less,” says Carl Drummond, senior wealth planner at Sanlam UK. “Starting to plan today is important as the problem will only compound over time and become larger.”

Potential changes to inheritance tax (IHT) and capital gains tax (CGT) are top of the worry list for many, says Matt Conradi, head of client advisory at Netwealth.

“Any adverse Brexit outcome that leads to a Labour government could put both of these areas under the microscope,” he says. “With CGT at 20 per cent for higher rate payers versus income tax at 40 per cent, CGT could easily be increased and the current IHT benefits of pensions are also highly favourable.”

When passing down wealth, political changes are just one consideration — how much to give to the younger generation, when to give it, and whether it will be used wisely also matter.

“In particular, finding a balance between tax efficiency and control can be difficult,” says Mr Conradi. “For example, Junior Isas and bare trusts can be highly tax efficient, but children would gain access to the funds at age 18 which might be sooner than one would like.”

For this reason, building a pension fund for your children could appeal. “You can leave them more cash flow to cover day-to-day expenses such as school fees or mortgage payments while knowing they can’t access the pension fund until later in life,” he adds. “Changes to the pensions annual allowance mean it’s more important to start saving into your pension sooner.”

Rachael Griffin, tax and financial planning expert at Quilter, also points out that with inheritance tax under review by the Office of Tax Simplification, the upcoming year could bring changes to IHT reliefs.

She advises exploring whether you are making full use of existing gifting allowances, as well as gifts from regular income, which will not be subject to IHT. Larger gifts, such as money for a property deposit, can also be tax-exempt “as long as you live more than seven years from when you make the gift”, she adds.

Finally, consider your grandchildren. “It is increasingly accepted that financial planning and wealth preservation should look beyond simply passing assets to the next generation,” says Paul Falvey, tax partner at accountancy and business advisory firm BDO.

“Four generation families are becoming more common. Typically the oldest generations have benefited from a benign welfare system, rising property prices and good pension provision. It is unlikely that their heirs will enjoy such benefits.”

From an inheritance tax perspective, Mr Falvey argues it makes sense to skip a generation as younger heirs are likely to require the funds most. Property deposits are the obvious need — but given the uncertain investment outlook, the earlier money is paid into a pension, the longer it will have to compound.

Property: deal or no deal

Buying a home is stressful at the best of times. But Brexit has added a new layer of uncertainty to the housing market, leaving buyers and sellers worrying whether prices will crash, and whether they should press for a big discount — or hold off transacting until the fog lifts.

For first-time buyers backed by the Bank of Mum and Dad, these questions are even more acute, since many will be stretching their finances to secure a mortgage.

Housing market experts agree that a disorderly, no-deal Brexit would be likely to hit prices and transactions hard. But even if the cliff edge exit is averted, a slower market beckons in early 2019.

Neal Hudson, director of market research firm Residential Analysts, says that a “muddling through” scenario would lead to a moderate slowdown in the first three months of the year, as buyers — most of whom are not obliged by personal circumstances to transact — are more likely to sit tight.

“We may see some weakness come through in the new year in terms of mortgage approvals and transactions,” he says, adding that the stagnation currently seen in the London market may spread across other parts of the UK as people put off decision-making.

In the two years since the referendum, Brexit has only had a muted impact on prices and activity beyond London and the Southeast, with average prices rising by up to 15 per cent in cities such as Edinburgh and Birmingham, according to data from Hometrack.

However, the Royal Institution of Chartered Surveyors produces a more forward-looking guide to sentiment. Its most recent research found that 14 per cent more surveyors reported a fall in interest among buyers — the third monthly report in succession to find a drop in demand across the UK.

Average levels of housing stock available to buy were close to an all-time low, the Rics said in its October residential survey, while new instructions were down in virtually all regions of the UK.

“The weaker trend in prices is being driven by the lack of demand from new buyers, which is in part a result of heightened political uncertainty, ongoing affordability pressures, a modest upward move in interest rates and a lack of fresh stock coming on to the market,” the Rics says.

Buyers may seek to take advantage of the torrid market over the next few months. Henry Pryor, an independent buying agent, says that the deals he ushered through in the past month had come in at an average 10-20 per cent lower than asking price.

“The longer uncertainty continues, the easier it is to get yourself a better deal,” he says, adding he was highly doubtful that market clarity would suddenly descend either following next week’s parliamentary vote on Mrs May’s deal, or after next year’s planned departure from the EU.

“This is like climbing a huge mountain,” Mr Pryor adds. “We’re breaching one horizon on December 11, only to find another one looming on March 29. Once we reach that, there will another one ahead of us.”

He adds a note of caution for those tempted to prioritise bargain prices over their core criteria when considering a purchase. “The important thing is not to fixate on getting a good deal. You should fixate on paying the right price for the property that suits you.”

Reporting by Kate Beioley, Lucy Warwick-Ching, James Pickford and Claer Barrett

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