Panicking about Brexit and your pension? Keep calm and carry on reading…and investing.
When the UK first voted to leave the EU there was an understandable flurry of concern and discussion about what it would mean for pensions. More than three months on, the dust has started to settle. What have we seen regarding the impact of Brexit on pensions?
The long-term impacts of leaving the EU are an unknown, not least because the terms and technicalities of extricating ourselves are far from certain. However, we can observe the short-term effects of the vote and its immediate aftermath. The implications for the money you’ve set aside for your retirement depends on what type of pension you have and how close you are to needing it.
Before the referendum, then-PM David Cameron warned that the state pension triple lock would be under threat in the event of a vote for Brexit. However, new PM Theresa May has now confirmed that the triple lock will stay in place at least until 20201. That means the state pension is guaranteed to rise by the highest of: price inflation, average earnings or 2.5 percent.
Income drawdown gives retirees the option to leave some of their retirement pot invested in the stock market and take regular income as it (hopefully) grows in value. Many people have taken advantage of the new pension freedoms by transferring their money into pensions that offer income drawdown. The stock market was very volatile following the Brexit vote, casting retirement incomes into uncertainty.
However, many of the large pension funds that millions of Brits belong to are highly diversified and haven’t suffered as badly as expected. Although share prices fell, gains in bonds and sterling helped to balance out some of the drops.
If you’re still several years or more away from retiring, the best thing to do is to sit tight and keep saving regularly. Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown, cautioned: “In these conditions, acting in haste is unlikely to serve well.”
Annuities offer a guaranteed income for life in exchange for a lump sum payment when you retire. Annuity rates have taken a hit since the Brexit vote, which means providers are cutting the amount they will pay to retirees opting to buy an annuity now. It’s possible that rates will fall even further in the near future. The new pension rules mean it’s not compulsory to buy an annuity, so people retiring in the Brexit era would be wise to take advantage of the freedom to examine all the options.
The income people receive from final salary, or defined benefit, pension schemes is not affected by stock market volatility. That means they were largely unaffected by the vote to the leave the EU and the market turmoil that followed. However, Brexit does put extra pressure on the employers which provide final salary pensions. As this type of pension is linked to the financial health of the employer, there is considerable long-term uncertainty for people with final salary pensions2.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.
1 Brexit – how will pensions be affected? 24th June 2016
2 Don’t panic – yet. The Brexit vote has had a surprise effect on pension funds 2nd July 2016