In or out? Leave or Remain? It’s the question that’s got the entire nation – if not the entire continent – hot under the knotted handkerchief. We’ve heard arguments on both sides – but what does this climate of uncertainty really mean for your personal finances?
Of all the arguments made for and against the UK staying in the EU, the economic ones have been among the loudest. Everyone from former London mayors to the current head of the Bank of England has weighed in with predictions about how a Brexit might affect the economy, and the UK public is having to sift a lot of conflicting information before reaching a decision.
But you don’t need to take sides to accept one simple fact – which is that the current period of uncertainty is hardly ideal for the economy. Investors are holding back on big decisions until they know the outcome of the referendum, and that’s being felt in the form of a dipping pound and volatile stock markets. This in turn may affect you directly if you are soon to retire or have recently begun to draw upon your pension.
How might the uncertainty affect my pension?
The government has already made pessimistic predictions about the impact a Brexit could have both on private pensions and on the state pension (claims that are contested by the Leave campaign). However, the effect of the current uncertainty is a different issue entirely. Pension pots depend on the stock market for growth, so poorly performance there could lead to temporary losses for pension savers.
A short-term dip in the value of your pension pot is not a problem if you’re some way off retirement. However, if you’re ready to draw your benefits then it could be more relevant to you. For instance, if your plan is to buy an annuity, then you want your pension pot to be at its absolute peak just before you do so. The good news here is that most default pension funds assume you will want to do this, so will move your money to lower-risk assets like cash as you approach retirement. This means a stock market slump shouldn’t affect you too much.
However, the outlook may be more gloomy if you’ve chosen (or plan to choose) a drawdown scheme. This strategy leaves your money invested in the stock market, so any fluctuations there are reflected in your pension pot. The time when you least want this to happen is right at the start, when you begin to draw on your savings. If equity prices fall soon after you start to take income, your pension fund may fall in value much faster than originally predicted. It may then fail to recover sufficiently to make up for the early losses, so you will have to reduce your income in the long term in order to avoid running out of money.
So what should you do? Given than uncertainty is the main culprit here, it is probably worth waiting until after the referendum result is in before making any big decisions relating to your pension. If the UK does vote to leave the EU then the period of uncertainty is likely to continue for a while, so you may need to delay your decision a little longer – but it is to be hoped that markets would eventually settle down. A vote to remain is likely to bring an instant short-term spike in the markets – but again, don’t expect this to be more than a blip, as ultimately very little will have changed.
Your personal voting guide (to retirement planning)
If nothing else, the EU referendum shows how much can hinge on an apparently simple choice. Just as the UK has to make this big decision about its future, so will every individual in the UK have to make a series of critical choices regarding later life. Questions on which you may need to hold your own mini-referendum include:
- Should I stay with my current pension provider or move to a new one?
- Should I unify my pension pots, leave them all separate or leave only some separate?
- Should I opt for the certainty of an annuity, or the opportunities and risks of drawdown?
- Should I keep my defined benefit pension or transfer it?
- Should I retire now, later, or gradually over time?
- Should I defer my state pension to boost its value later?
- Should I release some of the value of my home?
These are just a few of the questions you’ll need to ask yourself, and probably discuss with your family too. However – unlike with the EU referendum – it should be much easier to know what each course of action actually involves, and to work out which option is best for you. By talking to an independent financial adviser, you can be confident of receiving a full, frank and impartial assessment of all the potential outcomes.
Taking financial advice now means that you can be prepared for all eventualities in retirement – whatever the outcome of the EU referendum.
A version of the above article was first published by unbiased.co.uk on 13th June 2016.