What the EU referendum result could mean for your pension
What underlines all of the arguments for and against Britain leaving the EU in its current form is uncertainty. Despite all the rhetoric and alarming predictions by public figures on both sides of the argument, the fact remains nobody knows what will happen.
At Moneywise we often talk about how important pensions are, so we present what each side is saying about your ticket to enjoying your autumn years. But do remember that uncertainty is so high that even the Bank of England has said that none of its economic models work properly, so none of these are predictions, rather a collection of the arguments from both sides.
To stay or not to stay?
David Cameron and George Osborne, who want us to stay in, certainly haven’t been shy in bringing up pensions when it comes to outlining their reasons for wanting to remain as part of the EU. Mr Cameron has said that if Britain leaves, the ‘triple lock’ guarantee would be under threat, and along similar lines, the Treasury has calculated that those who receive the state pension will be worse off by £137 a year.
This hasn’t gone down well with Iain Duncan Smith MP, formally of the Department for Work and Pensions, who says: “The truth is that these are policy choices and the Conservative Manifesto said that protecting pensioners was a priority. It is now apparent that there is nothing they will not use or jettison in their efforts to keep us in the European Union.”
The other issue is that many people believe that the UK stock market would fall, a market that a lot of UK private pensions are heavily invested in; meaning the value of your pension would fall too.
But it is worth noting that if your pension is being managed properly, the manager will have hedged against this risk, and with many people hinting that any fall would quickly recover due to many large UK companies being so outward facing and their profit coming in dollars, it may not be an issue at all – as long as you don’t need to withdraw money in the short term.
Yet another issue is inflation – if prices rise and you are on a fixed income from an annuity then your spending power will be lessened – not to mention the bite this would take out of any savings you have.
There is also the matter of British expats living abroad who receive a UK government pension. A falling pound would mean less spending power in their adopted country.
The Leave camp has a different take on things. Iain Duncan Smith says that European bureaucrats would want to take control of the UK pension system “after an aborted pensions power grab in 2013.” He is referring to the Institutions for Occupational Retirement Provision II directive, or IORP, which was an attempt by the EU to force companies to plug ‘black holes’ in their pension schemes. In this case, the argument being put forward from Leave is, essentially, ‘whom do you trust with the state pension scheme more: British politicians or European politicians?’
There is also the not-so-small matter of the Pension Protection Fund (PPF). This is a scheme that steps up to protect workers’ defined benefit pensions in case of an upset.
If you are already retired you’re covered 100%, but those still working or who have retired early can expect 90% of their entitlement, capped to £32,761. The Pensions Act 2014 aims to boost this limit, but this legislative change is outstanding.
The reason Brexit could affect this is because the original scheme, devised in 2005, was created to comply with European regulation on workers’ pension funds. It’s unlikely that a Brexit would take away the existing protection, but would there be any political will to make changes if they’re not required?
According to the Society of Pension Professionals (SPP), who quote a report from Woodford Funds, the top 100 most costly EU regulations for British business is estimated at £33bn per year. The Leave camp claims that these savings, along with the freedom from future EU regulation means that the UK would be free to design its own pension schemes – and have the funds to do it, making EU regulations irrelevant.
The SPP also states that “…the corner stones of UK pension policy are trust and contract law – and neither is significantly impacted by EU law… Nevertheless, there are certain EU policies and regulations which materially affect the operation of UK schemes.”
Aside from the mentioned PPF, here are some more EU pensions issues to consider:
- Equality Legislation – this is to ensure gender-neutral annuity rates. It has been a controversial piece of legislation as it has reduced annuity rates for men, which used to be higher than for women, based on the fact that women tend to live longer on average.
- Pan-European Personal Pension Products – this is an attempt to create an EU-wide pension product. It has been criticised for not integrating with the existing UK pensions market, particularly Group Personal Pension products (IORP).
- Cross Border Schemes and Institutions for Occupational Retirement Provision – Schemes such as the Republic of Ireland/UK are EU authorised, and would most likely need to be rewritten in the event of a Brexit. As for IROP, there are two pieces – the first allows pension funds to operate across multiple EU states, and the second, which is currently under negotiation, asks for stricter requirements for potential trustees and the appointment of a depository. It formally demanded greater solvency requirements, but these have been negotiated out. It would be simple to say that a Brexit would shed this piece of upcoming regulation, but Britain would still be in the EEA, and so have to abide by this rule, but we would no longer be in a position to negotiate.
- Capital Markets Union – this is an attempt to create a single market for capital in Europe. This would make markets less reliant on banks, and allow for greater and easier investment in SMEs and infrastructure projects. Some of the big investors in this are pension funds. There are questions over access to this in the event of a Brexit.
- Qualifying Recognised Overseas Pension Scheme (QROPS) – this means that some people overseas can receive UK pension benefits without incurring a charge. Those living in places such as Malta and Gibraltar have been the biggest beneficiaries.
- Passporting – this is a general point, in that almost all UK regulation is based on EU directives, and some pension products which come from the EU may no longer be available in the UK if we leave.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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).
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.