It feels like Brexit has been going on far longer than the two and a half years since the original vote, but is something that we, as pension advisers, are talking about more than ever. Why? Because when we meet with individuals, many of them – both UK and EU Nationals – ask us the same question: How will Brexit affect my Pension?
There’s no doubt that Brexit has affected the pension market, but pensions have changed in other ways in recent years and whilst it’s important for pension savers to ensure they retire in the strongest position possible, there will always be areas beyond all of our control. In my opinion, the biggest impact of Brexit on Workplace Pensions is unlikely to be any changes to the rules currently in place, but more on the investment return of pension funds. This is linked to the performance of the UK and EU economies – as well as the economic performance of the rest of the world – and investment return impacts on the value of your Workplace Pension. Pension funds performance is directly linked to the UK economy, as a large proportion are invested here through UK equity holdings or UK bonds.
As reported by Moneyfacts*, pension funds had a strong year in 2016 and the year-on-year performance was the highest since 2009. Brexit was at the heart of that, with stock markets benefitting from the falling value of sterling, which subsequently encouraged foreign investment to the UK. This drove the FTSE 100 to hit new record highs, which was good news for pension savers, as this improved performance resulted in higher pension pots for retirement.
However, growth slowed in 2017 and then in 2018, we saw the first year-on-year loss for many pension funds since 2011. It might be unfair to place the blame for this solely on the shoulders of Brexit, but the existing uncertainly and potential risk of a ‘No Deal’ has certainly influenced market behaviours. When Brexit finally comes around, whatever impact it has on the economy – positive or negative – will have a significant influence on Workplace Pensions. We should also bear in mind that the nowadays-rare Defined Benefit pensions, offering a guaranteed income to pensioners on retirement, are still paid from funds invested in the markets meaning a severe negative downturn could finish these off for good.
The possible impact of Brexit on UK state pensions, where the big determinant is the size of the current tax base used to pay state pensions currently in payment, is a little more straightforward. Whilst these are dependent on the economic state of the UK, tax and national insurance funding this, the population’s size and age are both key – which is related to future levels of immigration to the UK. This was considered to be the single biggest driving force behind the vote to leave the EU, but post Brexit migration legislation is very important as we NEED increased workers in the UK to fund state pensions for our aging population.
Therefore, although we can look at the potential impacts on pensions, it’s possible that the two biggest Brexit unknowns – the impact on the economy and immigration – are the most important factors. In terms of what will have the biggest impact on how much people have as a pension, these are both likely to dominate any implications that arise as a result of future changes made to pension rules.
We will continue to monitor the investment performance of Workplace Pension funds very closely so if you would like any further information, please get in touch.