What would a ‘no-deal’ Brexit mean for your retirement?
With ‘Brexit day’ just three months away, there remains plenty of uncertainty as to whether Theresa May will achieve the votes she needs to approve the deal she has brokered. The parliamentary vote is due on the December 11th.
All outcomes appear to remain possible including a ‘no deal’ Brexit. In this scenario, much would change from an operational perspective including how we trade and share information with the EU.
From a retirement perspective, UK pensioners living in the EU would bear the brunt of a ‘no-deal’ Brexit. For instance, whether they will still be able to draw from their pension pot as they now can is unknown. For pensioners who remain in the UK, they will still be able to draw from their pensions as they can currently. However, the value of their pension pots may rise or fall depending on how investment markets interpret the final outcome.
Here are some key points about pensions in the event of a ‘no-deal’ Brexit:
For pensioners living in the EU
Whatever the outcome of Brexit, pensioners living in the EU will still be able to receive their state pensions. What’s unclear is how much that pension will be worth over time.
At present, state pensions rise in accordance with the ‘triple lock’ – the highest of earnings, price inflation or 2.5%. At present, the increase applies to pensioners living in the UK, the EU, or in other countries where a social security agreement with the UK is in place. If there is no deal, the UK would need to individually broker social security agreements for each country to ensure the value of the state pension for UK nationals living there continue to increase.
Otherwise, state pensions would still be paid but the level of increase would be frozen as is currently the case for British pensioners living overseas in countries like Australia and Canada.
The impact on private pensions could be even greater.
With no agreement in place, any UK insurance company paying, for instance, an annuity into a EU bank account for a British national in the EU would no longer be authorised to do so. This pension provider would then risk fines if it continued to operate in the EU.
To continue to make payments, the insurer would either have to set up a subsidiary company operating in the EU or strike some sort of deal with a European counterpart. Whatever the case, this would involve plenty of work on behalf of UK insurers.
Alternatively, pension providers could pay into a UK bank account. However, for someone taking money out of this account and placing it into a European bank account, or just withdrawing it directly, transaction fees would likely apply.
For pensioners remaining in the UK
Pensioners remaining in the UK would be less affected, although it is likely that we will see more volatility than usual in the value of UK pension funds as financial markets come to terms with the outcome.
For instance, a ‘no deal’ could lead to a fall in the profits of UK companies making exports to the EU. Equally, we could see an improving financial position for UK companies in the event of a fall in the value of sterling. This lowers the cost of UK goods to foreign firms and improves the fortunes of UK firms who derive their income overseas.
It is worth noting that while a good deal of British pension money is invested in the UK, a significant portion is also invested in overseas companies which aren’t as exposed to any potential Brexit fallout. The key message is to ensure that your pension pot is sufficiently well diversified.
Ultimately, it’s in the interests of both parties – the UK and EU – to secure an eventual deal. Both will be worse off if Britain exits the EU without a deal in place.
If you’re concerned about the impact that Brexit might have on your finances, don’t hesitate to get in touch. We’d be happy to help.
Craig Harrison is Managing Director for Creative Wealth Management, having joined Creative Benefit Solutions in 2008. He is among the highest qualified advisers in the country, holding the title of Chartered Financial Planner in addition to the Investment Management Certificate (IMC). When not working, Craig is an occasional runner and cyclist which helps combat his love of food, especially cheese and red wine!