Brexit batters pension plans – from falling annuity rates to slashed savings, it hasn’t been good for wannabe retirees
Many people have had thousands wiped off the value of their Sipps and investment portfolios in the short time since Brexit.
The bad news is that markets are likely to remain uncertain. The good news is that they will probably recover and have a solid period of rises, as the general trend over history shows. We just don’t know when. Markets are likely to be very fragile in the next couple of years.
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As annoying and disruptive as this saga has been, it’s helpful to think of it as a blip like any other. “Volatility is part and parcel of equity investing and shareholders are invariably rewarded over time for accepting the risks of stock market investing,” says Tom Stevenson of Fidelity International.
“Remember that the best days in the stock market very often follow hot on the heels of the worst ones and missing these rallies can seriously compromise long-term investment returns.”
The longer you have until retirement, the better the chances are that your investments will grow in value.
Nearing retirement
One of the biggest implications of Brexit is for people approaching retirement. The yield on UK government debt (called gilts) has fallen to record lows, because investors have moved their money into safe places, and government investments are considered some of the safest.
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However, the value of pension annuities is linked to UK gilts. As government debt yields fall, so does the amount of money a pensioner can hope to retire on with an annuity. “The amount of income a retiree can secure from their pension has already fallen significantly,” says David Smith of Tilney Bestinvest. The Bank of England has stated its intention to boost the economy with a potential interest rate cut or possibly more QE. This will compound the problem further, he adds.
People in final salary pension schemes have also been dealt a blow. Market falls in the wake of the referendum have widened pension fund deficits. This increases the risk they’ll become insolvent.
“Those approaching retirement in the near term should perhaps consider delaying it for a period, or perhaps look to alternative forms of retirement instead of an annuity,” Smith says.
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“For example, taking withdrawals via flexible drawdown or buying a third-way annuity that can provide a fixed income for a short time, are both ways of ultimately delaying the decision to conventionally annuitise.”
For those approaching retirement, remember pension schemes won’t make you withdraw cash.
“We sometimes see people taking cash from their pension savings at retirement just because they can. Many don’t realise that most pensions allow you to leave the money invested until you need it,” says Richard Parkin of Fidelity International.