The dust hasn’t really settled yet after the Brexit vote – certainly not as far as pensions are concerned. As ever, there are very different scenarios depending on whether people are near retirement or a long way from it.
For those who are currently saving but have years to go before they retire, the market volatility and outright falls in some shares may represent buying opportunities that may help fund values in the long term. For those nearing retirement, the miserable returns on annuities unfortunately look set to continue, with interest rates being maintained at extremely low levels. However, insurers have been forced by the EU to hold large amounts of capital against their annuity obligations. It’s possible that a slight relaxation in this requirement might occur after Brexit, but it’s unlikely to result in anything but a minor improvement in annuity rates. Pensioners who have taken the drawdown option will very likely be adversely affected if there is a sustained downturn in the markets.
Defined-Benefit Schemes
Eleven million Britons have pensions with defined benefits. These depend on the financial robustness of the employer sponsoring the scheme. Some experts have commented that the benefits from these schemes may be less certain in future, particularly if the return from equities is diminished and the trustees of the fund then look at it and decide contributions need to rise.
State Pension – Triple Lock Under Threat?
Then there’s the state pension. Pensioners already in retirement have benefited from the “triple lock”, which gives a pension rise in line with either price rises, average earnings or 2.5% – whichever is the highest. There were mutterings even before the referendum that this was unsustainable. During the campaign, David Cameron warned that this arrangement might be affected if there were a major downturn in the economy. Like so many other dire warnings at the time, it remains to be seen if this will come to pass or was merely sabre-rattling.
Retired ex-pats are in a particularly uncertain position. The fall in the pound has affected their income. However, we are back to volatility. Currency traders are not sure where the pound is going to end up in relation to the euro, so it is probably too early to comment.
Tax Relief on Pension Savings
The future for pensions saving doesn’t look too settled either. There were widespread reports before the budget that the Chancellor was planning to get rid of tax relief on pension contributions and substitute a pension ISA instead. He’s believed to have shelved this plan until the referendum was over. Also on the table were plans to get rid of higher-rate tax relief altogether and have one flat rate, somewhere between the basic and higher rates. George Osborne has now gone, but it remains to be seen whether the new Chancellor, Philip Hammond, has similar plans.
If one thing is abundantly clear, it’s that making a decision without professional advice is not a wise option in this fast-changing environment, where what seemed certain last week is not the case this week. Luckily, Independent Financial Advisers make it their business to be up to date with the latest developments.
They will be able to asses how the changes will affect someone in your specific position. They’ll then be able to advise on a sensible way forward.
The aim is to protect what you have if you are near retirement, and if you have many years before retirement, to take advantage of any opportunities that may arise from the inevitable volatility.