Treasury warns Brexit would hit pensions
The Treasury has warned that millions of pensioners will be worse off if the UK leaves the European Union. In a newly released publication, it suggests that Brexit would cause a recession, send stock markets into a downward spiral and stoke up inflation.
As a result pensioners on the state pension would be worse off by £137 per year. Those with a defined contribution pension pot worth £60,000 invested through a typical pension fund would see its value drop at least £1,900 in case of a Brexit, the Treasury warned.
The research details that an individual currently aged 50 on median earnings who has a defined contribution pension, could lose between £3,800 and £5,800 from their pension savings by 2030.
Based on current annuity rates that would mean pensioners would lose retirement income of between £223 and £335 per year, compared with remaining in the EU, according to the Treasury's calculations.
Threats to pensions
Pensions minister Ros Altmann says leaving the EU would "put all the hard work we've done to reform and improve pensions in jeopardy in a self-defeating, pointless and unnecessary way".
"Millions of current pensioners would feel the impact of voting to leave the EU through inflation eroding their pensions as consumer prices rise and as volatility in financial markets hit their hard-earned pension savings, as well as suffering a fall in the value of their assets, including house prices," she says.
Chancellor George Osborne says: "Pensioners who have worked hard all their lives deserve dignity, security and certainty in retirement. That's what we all hope for and what any responsible government should seek to provide."
However, former pension secretary Iain Duncan Smith, who is campaigning for Vote Leave, says: "This is an utterly outrageous attempt by the government to do down people's pensions and is little more than a cynical attempt to distract from the government's broken promises on immigration.
"The biggest threat to British pensions is the European Commission's proposals to undermine occupational pensions, which the government themselves have described as 'damaging and reckless'.
"Meanwhile, tax proposals from eurozone countries will wipe billions off British assets hitting pension funds hardest."
This article was written for our sister magazine, Money Observer.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.