Whilst the full effects of Brexit are unlikely to be known for some time, Save & Invest have assessed some of the likely implications for retirement savings arising from the shock result last Friday.
In general we feel that Brexit effects will be broadly neutral for anyone more than 5 years from their preferred retirement age, or who is an active contributing member to a pension scheme so no immediate changes will be required. However we would always advocate that client’s review their retirement plans regularly.
In our view, the market impact of Brexit is most likely to affect those already in receipt of pension income, or who wish to commence pension income within the next 5 years.
One likely effect of Brexit is that over the next year or so, UK interest rates may reduce but inflation will rise. Combined, these two factors will put increased financial pressure on those who rely on a fixed income to cover expenditure.
Clients should consider an immediate review of their income strategy to help reduce capital erosion where possible, reducing levels or frequency of withdrawals, or ceasing payments from investments for a period.
Clients with Defined Benefit (e.g. Final salary Schemes) Pension Benefits
In the short term, pension schemes that offer a “guaranteed” income, such as traditional final salary schemes, are unlikely to be immediately affected in terms of their ability to provide this at the intended retirement date.
However, in the longer term if the sponsoring employer’s business model is adversely impacted due to Brexit the pension scheme may also likewise be affected if the employer cannot meet funding commitments.
Furthermore any long-term downgrading of the UK’s credit rating could impact on such schemes’ abilities to meet future pension payments, and impact the financial stability of such schemes.
If any of these risks materialise, pension scheme trustees may consider scaling back benefits to all members, to ease pressure on scheme assets and the reduce funding obligations of the sponsoring employer.
Brexit may also affect public sector pension schemes if the UK undergoes a long term GDP contraction.
Clients with Defined Contribution Pension Schemes
Clients with a “defined contribution” pension arrangement are likely to be affected by short term market volatility affecting the fund value available to provide benefits in the immediate future. Although some underlying investment funds may employ a “lifestyle approach” to help reduce the impact of volatility within a year of retirement, many will not.
As well, in the short term Brexit is likely to lower pension annuity rates, making this option less attractive for those aiming to fix their pension income in retirement. We would therefore suggest clients contact us to discuss what retirement income alternatives are available.
For clients with a retirement horizon within 5 years, the potential Brexit impact may be far less severe, as markets will adjust to new economic realities. However annualised returns may be lower than originally anticipated and this could affect what level of benefits clients eventually receive.
Will the UK State Pension be affected?
Any Brexit impact on the UK State Pension in the long term is extremely difficult to predict. However, it is possible that, should the UK undergo a prolonged recession or see sustained reduction in GDP, State benefits may become less affordable. In the medium term, one cost-saving available may be to remove the “triple lock” guarantee.
To keep State benefits affordable in the long term, it is also possible that National Insurance contributions may rise, future State Pension benefit accrual rules may change, and the State Pension Age increase further.
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