Following the news that the UK has voted to leave the European Union we ask what impact the move will have on your pension, whether you are years away, approaching retirement or already retired.
For savers in defined contribution schemes:
As the value of a defined contribution pension is directly linked to the stock market, members of these schemes will see the value of their savings drop on the back of the Brexit vote. Within minutes of opening the FTSE 100 lost 500 points with some banks falling by as much as 30%. But Tom McPhail, head of retirement policy at Hargreaves Lansdown is telling savers not to panic.
“For long term pension investors who may be seeing the value of their retirement savings falling today, the key message is to do nothing unless you have to,” he says. “We are likely to experience a period of volatility in the markets and uncertainty in the wider economy, in these conditions, acting in haste is unlikely to serve well. If you are years from retirement and making regular savings, then just keep going; falls in the market mean buying investments at a lower price.”
The news will be more worrying to savers who are closer to retirement and may not have time to make up significant losses. However, Mr McPhail still urged against making hasty decisions. “If you are close to retirement, then try to avoid selling funds and shares right now. Annuity rates may move in response to changing interest rates, however this is not certain. International and domestic demand for Gilts and Sterling denominated investment grade bonds will influence annuity rates, as will expectations of inflation and to a lesser degree, short-term interest rate movements.”
For those investors that have already retired and are drawing an income from their savings, Mr McPhail recommended limiting withdrawals to ensure remaining capital is not eroded further. “A good default strategy is to draw the natural yield (dividends from equities, interest on fixed interest stocks) as this means you aren’t cashing in the capital value of your investments at a time when they are falling in value.” He suggests that this is likely to be between 3% and 4%.
For members of defined benefit schemes:
Defined benefit schemes pay members an income based on their salary and the length of their membership and as such are not linked to stock market performance in quite the same way as defined contribution schemes. However, that is not to say they are sheltered from volatile markets as the assets required to cover their liabilities will be invested. According to Hargreaves Lansdown some 33% of all UK schemes is invested in shares, of which 25% is in the UK. Problems in the wider economy may also make it more difficult for employers to meet their funding commitments. Mr McPhail adds: “If the economy does now start to stall or even contract, then corporate profits will be hit and this in turn could lead to further funding issues for employers. The only good news is that a falling exchange rate may help these businesses to export their way back to profitability. “
What about pensions tax relief?
Following a lengthy consultation the Chancellor turned down the opportunity to change tax relief on pension contributions in this year’s Budget. However, Mr McPhail says this savings sweetener will remain an easy target. “Pension tax relief costs the exchequer billions every year and there may now be increased pressure to balance the Budget; the government top up to our retirement savings could be an early casualty. The current Chancellor George Osborne had threatened an emergency Budget in the event of a Leave vote. Whether this happens or not, the possibility of further curbs to pension tax relief has now increased, so investors would be well-advised to make the most of the available tax relief while they still can.”
Is my state pension safe?
During the referendum campaign, David Cameron warned that the triple lock on state pensions could be put at risk in the wake of a Brexit vote. This is because the policy – which ensures the state pension rises by the greater of earnings growth, increases to the consumer prices index or 2.5% - could become too expensive to maintain during a down turn. Mr McPhail says: “According to analysis conducted in 2011, the cumulative cost of the Triple Lock, relative to the old RPI link, between 2011 and 2026 would be £45 billion. If the Chancellor does now carry out his threat of a scorched earth Budget, then the Triple Lock could be an early casualty.”
However, Steve Webb, director of policy at Royal London says: “It would be odd for a government to prioritise a cut which would affect the most powerful voting bloc in the country.”
Tom Selby, senior analyst at AJ Bell also warns that there could be problems for British pensioners living in the EU as well as those that might be planning to retire there. He says: “Brexit could have severe implications for almost 500,000 UK pensioners living in Europe, or those who are planning to retire to the continent.
“At the moment, state pensions for those living in the EU are uprated in line with the triple-lock. However, leaving the EU casts doubt on whether this valuable benefit will continue as the UK may need to strike individual deals with each member state – presuming the Government doesn’t remove it altogether.
According to analysis from AJ Bell, a 65 year old retiring on the flat-rate state pension of £155.65 a week would miss out on at least £50,000 of income over 20 years without the triple-lock.