The UK has been out of the EU since 31 January 2020, however it took almost a further year to reach agreement over a deal. While this has been a source of relief, there are some areas still to be finalised, and no guarantee that the terms agreed now will continue indefinitely.
Matt Merchant looks at the implications of the Brexit deal as it stands, any areas that won’t change, and the points that are still uncertain.
Some Things Won’t Change
The first point to clarify is that the EU has very little input into UK tax or pensions law. This means that if you live in the UK and hold your pension here, not much will change unless a decision is made by the UK government.
The following aspects of retirement planning will be unaffected by the transition:
- Contribution levels and limits
- Tax treatments and reliefs
- Regulations around workplace pensions
- The ability to transfer between providers and scheme types
- How you draw your income, including tax-free cash and flexible benefits
Currently, there are no planned changes to the State Pension for UK residents as a result of Brexit.
Additionally, anyone already living elsewhere in the EU will continue to receive their State Pension with the full annual increase.
The position for anyone moving abroad after 1st January 2020 has only recently been clarified. If you do move to a country within the EEA or to Switzerland, you can still claim your State Pension with the full annual increase that applies to UK pensions.
Additionally, any social security contributions paid in the EU can still be credited to your State Pension if you return to the UK.
The implications of moving to the EU raise larger questions than how your pension may be affected. Freedom of movement is no longer possible, and residence in any of the EU countries will depend on their own requirements.
As well as your pension, you will need to consider:
- Visas or residency permits
- Eligibility to work, study or claim benefits if needed
- Availability of banking and other services
It’s vital to research your chosen destination thoroughly and obtain advice locally if possible.
The investment implications following the UK’s transition from the EU are less certain.
A consequence of Brexit is that EU shares can no longer be traded in the UK. Significant sums have exited London for alternative trading hubs in the EU. Whether this will be resolved, and the long-term implications on business and financial markets, remains to be seen.
If you have a money purchase pension, the value, and your eventual retirement income, will depend on the amount you contribute and the investment growth. This means that any event which affects the stock market could also impact on your retirement plans.
The following issues could cause the value of your pension (and other investments) to fluctuate:
- The share price of companies affected by Brexit could rise or fall. For example, if a UK company relies on exporting goods to the EU, their share price could fall if this becomes more difficult. However, the same company could benefit from increased trade in the UK or America, in which case their share price could rise.
- Currency swings can also have an impact. If the value of Sterling falls relative to other currencies, it will become cheaper for overseas buyers to import UK goods. It will become more expensive for UK buyers to purchase from abroad. This can affect a company’s profitability and share price depending on the proportion of their UK and overseas business.
- Similarly, currency fluctuations can also affect assets held abroad. For example, if the pound falls, any overseas assets will become inflated, and therefore more valuable when converted back to Sterling.
- Inflation is another important consideration. If the cost of living increases significantly, it’s possible that some investments, particularly lower risk assets, may not hold their value. This means that your pension could be worth less in real terms, even if the monetary value has gone up.
- Another consequence of inflation is its impact on interest rates. This will affect the returns on your savings, bond and gilt yields (which can, in turn, affect investment values) and borrowing (which will also have an impact on property prices and consumer spending).
Of course, any world event (such as a pandemic or a US Presidential election, to give two recent examples) can affect any of these factors. The difficulty is in predicting how and when they will influence a particular company or investment.
What You Can Do
Investment markets are unpredictable – this is simply a feature of investing. Any significant event, whether national or global, can cause stock market volatility.
These are our top tips for investing your pension:
- Diversify your assets across a range of asset classes, geographical regions and business sectors. This spreads the risk and lessens the impact of fluctuations in any one area.
- Don’t aim to time the market or be tempted to sell funds when prices drop. This is usually counterproductive. Pensions are a long-term investment and you have a greater chance of ironing out volatility if you stick to the strategy.
- Only take as much risk as you need to, and can cope with. Your risk capacity will most likely reduce as you approach retirement.
- Keep a cash reserve, as this avoids the need to dip into your pensions or investments when the markets are down.
- Ensure that charges are under control and that you are receiving value for money.
Brexit is simply one of many challenges we have faced. By having a robust plan and thinking long-term, you can build a comfortable and secure retirement.