There are a number of Brexit risks for pensions over the coming months. It’s a well-known maxim that investment markets and businesses crave certainty. Uncertainty creates problems in terms of where to invest, future income/expenditure projections and cash-flow management.
No geopolitical issue in the last 70 years or so has created more uncertainty than Brexit. Businesses are having to plan for outcomes which depend on a course of events that they have little control over. The UK government is playing their cards very close to their chest (or so they say), but either way, the only certainty business has is that of continued uncertainty.
Brexit and the economy
According to the Government document leaked earlier this year regarding the possible economic impact of Brexit, projections of the effect of Brexit vary from an optimistic 2% drop in UK economic growth to a disastrous 8%. ‘Leavers’ partly accept these figures, especially in the short-term, but maintain their position of a healthier UK economy over the longer term. In other words, no one knows for sure; it looks like we’re in for an extended period of uncertainty!
Brexit risks for pensions
Last week, when Airbus made a statement seen by the markets to be detrimental for the UK, Sterling dropped by almost 1.5% in a single day. Thankfully, for UK expats who rely on a stable Euro:Sterling rate to maintain the value of their pensions, the rate has crept back to where it was previously. However, the warning signs are there.
Personal financial planning is similar in many respects. We all like certainty; investment markets behaving themselves at all times, currency exchange rates being stable, tax rates being reasonable and inflation under control. Over in the real world, however, we rarely experience such ‘Goldilocks’ economic conditions and have to regularly adapt to changing circumstances.
How to reduce Brexit risks for pensions
When we leave the UK to work or retire elsewhere, we have many major decisions to make, especially with pensions. Below is a checklist some may find helpful.
- Gather all information you have about your pension plans
- Create a consolidated valuation of the above
- Make sure you fully understand how each scheme works
- Make assumptions about future values and income requirements
- Assess potential currency and market risks/opportunities available
- Consider other assets in context with the above
- Check death benefits
- Know your tax status
- Check your options regarding whether to transfer your pensions to a more appropriate environment
The question of how currency choice affects financial and retirement planning is key. Opinions are divided by Brexit with some claiming Sterling is doomed, whereas others see increased trade opportunities with the rest of the world as a preface to a stronger economy, which would positively affect the Pound’s exchange rate around the world. Once again, the truth is that no-one really knows. The most important consideration for anyone living and/or working in a multi-currency environment is to assess the risks, then act accordingly. If you want to completely eliminate currency risk, you need to make the necessary alterations to arrange your pensions in the currency you will ultimately spend.
Any other strategy involves risk, as pensioners in many EU expat retirement locations will tell you, having suffered losses of circa 35% to their UK state pension since the introduction of the Euro. Unfortunately, we can’t change how our state pensions are paid or denominated. However, we do have much greater freedom with our personal pensions. By taking a little time out to investigate our options we can ensure the same doesn’t apply to us whatever happens post-Brexit.