Now that Brexit is imminent, should you have concerns about your pension security? We look at the key implications for the State Pension, defined contribution schemes and defined benefit or ‘final salary’ schemes.
For many expatriates, their pension income is the key to living the retirement lifestyle of their choice. Now that Brexit is imminent, should you have concerns about your pension security? Here we take a look at the key implications for the State Pension, defined contribution schemes and defined benefit or ‘final salary’ schemes.
The State Pension
Currently, expatriates living in the EU are entitled to annual inflation increases in their State Pension payments as EU residents. This may change once the UK leaves the EU. Britons resident in non-EU countries like Australia and Canada, for example, are not eligible. However, the UK has reciprocal agreements with some countries to allow resident Britons the yearly increase, such as in Jersey and the USA.
Much depends on how Brexit negotiations unfold. Legally and administratively, there is no reason why the government could not extend the increase to retirees living in the EU. In these difficult economic conditions, however, a wider agenda for increased revenue could prompt the government to remove this benefit from non-UK residents.
Defined contribution pensions
With defined contribution pensions, what you can receive depends on how much has been paid into the scheme in contributions, tax rebates and investment growth.
Research from pension consultants Hymans Robertson found that three-quarters of defined contribution pensions could fall short of providing the income needed for a comfortable retirement. This is 10% more than before Brexit, worsened by the environment of low interest rates, weaker growth and an unsettled currency.
Now, people may need to save more, or for longer, to get the same amount as before Britain voted to leave the EU. The cost of buying an income for life in the form of an annuity, for example, has increased by up to 30% post-Brexit.
However, Brexit has not affected the flexibility with which you can take out or transfer money from defined contribution pensions. While there is speculation that the government may introduce an ‘exit tax’ on pension transfers, this has not been confirmed either way.
Defined benefit pensions
In a defined benefit pension, your employer guarantees a fixed proportion of your salary for the whole of your retirement.
The biggest issue facing these pensions is the stability of the providers financing them. Since Brexit, the cost of providing defined benefit pensions has become much more expensive as returns from the assets underpinning them – mostly UK fixed interest securities, commonly known as gilts or bonds – have shrunk. This, coupled with increased life expectancy, has created a significant shortfall for many companies in funding payments promised to scheme members. Companies with insurmountable deficits can fail alongside their pension schemes – BHS, with its £571 million pension deficit, is a recent example of this.
In an effort to reduce future pension liabilities, many companies are offering large pay-outs for members to ‘cash-in’ early. Dubbed the ‘Brexit bonus’, these pay-outs can be more than 30 times the annual income due on retirement, and have been known to increase by tens of thousands in a matter of weeks.
There is speculation that the government may try to discourage a mass exodus from defined benefit pensions by changing the law to make withdrawals more difficult. In the meantime, with such record pay-outs on offer, some members may be tempted to transfer out of their defined benefit pension without fully understanding the long-term implications.
Should you be taking any action?
While so far Brexit has not made too much of a dent in pensions, this is a good time to review your arrangements. Before making any decisions, seek expert advice to make sure you choose a suitable course of action for your individual circumstances and objectives.
If you have a defined contribution pension, you could consider transferring it to a Qualifying Recognised Overseas Pensions Schemes (QROPS). For many expatriates this is a suitable way to bring their pension with them and take advantage of tax-compliant opportunities available in your country of residence. A QROPS can also offer currency flexibility. By holding investments in different currencies, you could insulate your pension income from volatility in the pound and the euro during Brexit uncertainty. Specialist advice is important to first establish if QROPS is right for you, then find a suitable product and navigate the complex cross-border tax and jurisdiction issues.
If you have a defined benefit pension, advice is critical. Transferring has its risks and many members may benefit more by staying in the scheme, despite the appeal of a large ‘Brexit bonus’ in the short term. An adviser can help you weigh up the advantages and disadvantages of transferring and make recommendations tailor-made for you.
Of course, you may not need to take any action at all right now. During this period of Brexit uncertainty, however, it is worth reviewing not only your pension arrangements but your overall financial planning. By choosing a locally-based adviser with cross-border experience, you can keep up-to-date with Brexit developments that may affect you specifically as an expatriate.
Any questions? Ask our financial advisers for help