Whatever form Brexit takes, leaving the EU may mean a review of your financial arrangements becomes essential.
At Continuum, we are already looking at the potential impact on pension plans.
We believe that market volatility could have a significant effect on your pension pot – but that there are things you can do to protect yourself.
What is the threat to your pension?
Your pension plans themselves should be safe – but the wealth built up in your pension pot may suffer.
Pension funds are investments. Many UK pension funds have invested a large proportion of their assets in UK businesses. You may be concerned that if the UK economy runs into difficulties following Brexit, this could affect the performance of those investments, the wealth built up in your pension pot – and the pension you will receive.
A foreign exchange lifeline
However, it should be possible to overcome investment problems and safeguard your future retirement.
Most pension funds are already diversified, which means that their investments are spread across a wide range of assets, sectors and geographical regions. If one asset, sector or region suffers a downturn, returns from more successful sectors should offset the loss. This reduces the risk that a downturn in one market will affect their overall holdings.
Diversification means funds should include investment in overseas companies – but even if a fund appears to have invested in UK businesses, it should still have an international base. Around 70% of major UK companies listed on the FTSE 100 generate a high proportion of their earnings overseas.
If the value of sterling falls, as it did after the Brexit referendum and may do so again after Brexit itself, the value of these foreign earnings would increase when converted into pounds.
But when it is the future of your pension at stake, you can’t afford to be complacent. The actual impact will depend on the type of pension you have.
Brexit and the state pension
The UK state pension is uprated in line with the government’s triple-lock commitment, which requires the state pension to rise by inflation, wage growth or 2.5% each year, whichever is the highest.
The maximum new state pension you can receive is currently £168.60 per week.
Brexit should have no direct effect on this – but it may increase if inflation becomes a serious factor.
Your employers scheme
Many employer schemes are defined contribution schemes, which will build a lump sum dependent on your level of contribution, and the performance of investments.
A well-managed scheme should be able to weather Brexit storms – but you should probably talk to your pension administrator about performance, particularly if you are getting close to retirement.
There is little you can do to change the investment stance of a group scheme, but if you are aware of a shortfall you will have the opportunity to do something about it, possibly by arranging a personal pension, or increasing your contributions to one you already have.
Your personal pension
If you have a personal pension where you have some control over investment style, it is essential to review how your pension savings are currently invested. If your retirement date is getting close, now may be a good time to review your circumstances.
If retirement is still many years away, you should still review your pension in order to ensure this is aligned to your investment objectives and financial circumstances.
What about drawdown?
If you’re currently drawing an income from your pension pot whilst leaving the rest of it invested – known as drawdown – you need to look carefully at your investments. Highly volatile equity investments may offer the most exciting returns when things are going well, but they can fall dramatically when things do not. High stock-market volatility could mean that in a falling market, you must sell more units to receive the same income.
You may want to look at the possibilities of converting at least some of your holdings into less volatile assets.
What if you live abroad?
According to government figures, around 1.26 million UK pensioners live abroad, with almost half a million of those in the EU.
This could mean complication for those involved. Any increase in the state pension is passed on to British pensioners in European Economic Area countries, and countries where there is a reciprocal agreement.
If it is a no-deal Brexit, the UK would probably negotiate reciprocal deals with each of the 27 EU member states – but there is as yet no guarantee that this will happen.
If you live overseas, you may want to look at your pension funding as a matter of urgency.
Getting the most from pensions can be complicated enough in stable economic conditions. When the outlook is stormy, getting professional financial advice is essential.
At Continuum, not only are we experts in pension planning and management, our Advisers monitor the markets continually.
There could be a post Brexit downturn until the country finds its feet, or a boom which offers opportunities to grow your pension pot.
We can provide the help you need to make the most of your pension – whatever Brexit holds.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments and pensions, and the income they produce, can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.