Two months on and apocalyptic Brexit headlines continue to dominate newspaper front pages around the world. The Pound is crashing. Scotland is threatening a second referendum. Civil war consumes the Labour party.
After felling a Prime Minister and his chancellor, Brexit went on even to eviscerate those who led its campaign. Top Brexiteers Michael Gove, Boris Johnson and Andrea Leadsom have all had their Prime Ministerial ambitions shattered, while Nigel Farage, after realising his primary political ambition, retires quietly to some provincial enclave to live out his days in the manner of the artist who knows they will never again live up to their greatest work.
But enough of the self-serving politicians who brought us to this point. What does the referendum result mean for you – and your pension?
Despite gloomy forecast after gloomy forecast in the months leading up to the UK’s historic vote, the early signs are, against all odds, promising. Rather than capitulating, the major funds that contain millions in workers savings remain buoyant. Many are even growing stronger.
The value of the UK’s single biggest pension pot, Aviva’s £39bn with-profits fund, rose in the days following Brexit. Standard Life’s £20bn Managed pension, the next biggest fund, climbed 2.1% in a week.
Other big providers benefited from the same unforeseen post-Brexit bump: Scottish Widows’ fund was up 4.3%, while Scottish Equitable’s rose by 3.7%.
But how can this be? How can a nosediving economy lead to stronger pensions? In short: pension gains from bonds and sterling have more than made up for any losses incurred as a result of the volatile market environment. While pension pots have been eroded by tumbling share prices, these other Brexit forces have combined to transform what could have been a disaster into a welcome boon for pensioners.
As John Blowers, head of Trustnet Direct explained to the Guardian:
“The weak pound means sterling-denominated assets are now cheaper for overseas investors, which is helping support equity prices, while many companies listed in London get a hefty share of their profits in a foreign currency. We can’t say this is the end of the referendum-driven volatility, but for now long-term investors [i.e. pensioners] should remember that it could have been a whole lot worse.”
For those pensioners who bit the bullet and traded their pension for annuities, however, the outlook isn’t so rosy. Rates were already falling over the past 12 months but analysts say that Brexit has accelerated this trend. Just Retirement cut rates by 2% – that means, if you have a deal with the annuity provider, every time you take money out, for the rest of your life, you get 2% less than you would have before Brexit.
Public pensions are currently protected by a triple-lock system. One of the Cameron government’s flagship policies, triple-lock means state pensions automatically rise in line with average earnings, inflation or by a 2.5% rate – whichever is highest. Despite intense pressure to drop what has been called a nonsensical “political construct”, the government says they currently have no plans to axe the popular pensions guarantees policy.
But if, as many analysts predict, Brexit opens up a black hole in the UK government’s finances, new Prime Minister Theresa May and her Chancellor Philip Hammond could be tempted to ditch it. Doing so would free up billions in public money – and with a weak opposition in the form of Corbyn’s capitulating Labour Party, May might also feel she has enough political breathing room to risk upsetting the powerful pensioner voting block.
The longer term impacts of Brexit on state pensions will depend, in part, on the relationship that the UK seeks with the EU in the future. The government has two years to negotiate new trade partnerships – the success or otherwise of these negotiations and the quality of the deal diplomats are able to arrange will define the true effect of Brexit on public finances – and the government’s plans for pensions thereafter.
For those with private pensions, a lasting reduction in the value of sterling could yet wreak havoc. As the pound falls, imports into the UK become pricier, which puts upward pressure on the inflation rate. A rise in inflation means a rise in the cost of living and therefore value being wiped off private pensions, as pensioners receive the same level of payment but the money doesn’t go as far as it did before.
There are many contributing factors – and many types of pension – so your best bet is to find out which kind of pension you have and research from there. In the short-term, your pension is safe. But as the months in the lead up to the UK’s exit tick by, fill any empty days with the formulation of a Plan B. There could be many more rewarding places to store your long-term servings.
As always, if you need any help with your pension, or any other aspect of your financial planning, then please give us a call on 020 7467 2700.