What a tumultuous week it’s been. It is amazing how quickly seismic political change can happen; whether it be the final days of the Berlin Wall coming down, the end of Communist Russia or now Brexit. Not since the GFC have markets had to deal with such uncertainty, driven by the political and economic unknown of what a Brexit actually means. For some, the uncertainty creates opportunity; for others, it creates fear.
Even in the depths of the GFC – and let’s remember that the financial world as we knew it was on its knees – the world largely recovered. Make no mistake, Brexit is not the GFC, in its length of breadth, but it’s highly likely that there will be some pain to come; the extent however is yet to be determined.
So if you have migrated abroad and you have UK assets such as a UK pension fund (be it a State or Private Pension), you’re probably wondering what Brexit means for you and your money?
The advice from bdhSterling is to Keep Calm and Get Brexit Advice! And I don’t mean general advice from the cab driver, I mean tailored advice about your individual situation; by an objective and appropriately licensed adviser so you can make an informed decision. With the media now in hyper-drive, it is hard to know where to turn to get accurate information.
Dulling the Buzz
Personally, there is nothing worse than lying in bed unable to sleep due to stress or uncertainty. At time to time, it happens to all of us.
A former Zimbabwean business partner of mine referred to it as having bees in your head. My wife’s antidote to the bees is to write your issue down, clear you mind and call someone in the morning. My wife is a wise woman; the solution works, and I recommend that anyone who is concerned about the impact of Brexit on their financial situation to follow suit; write down your concerns and contact bdhSterling to discuss. It’s a time now for level heads.
We speak your language
For anyone who doesn’t know what we do, bdhSterling specialises in Cross Border (financial) Solutions. We have offices in Australia, the UK, New Zealand and South Africa and basically, we integrate global and local financial advice for our clients who have worked or lived in the UK (and a range of other jurisdictions). We provide advice on both private pensions and broader UK assets and are able to provide an international perspective with a local approach.
Many of our advisers have been on the same journeys as our clients – they have packed their bags and set up life on the other side of the world, giving them unique insight into the hoops that have to be jumped through to manage your finances from abroad. Some of them even voted in the recent referendum!
We know what it’s like to deal in different time zones, away from family and friends. We know how foreign exchange can be a foreign concept. And we know which is the right code of football! At bdhSterling, we speak your language.
A problem shared is a problem halved
As our clients traditionally have a number of UK pension types, I will outline some the potential impacts of Brexit and provide some solutions that might assist in addressing them.
UK Private Pension Funds
bdhSterling is licensed to advise on both types of UK Private Pensions:1. Defined Contribution (DC) Schemes, also known as Money Purchase Schemes, and 2. Defined Benefit (DB) SchemesBrexit will affect both DB and DC Schemes but in somewhat different ways through currency volatility, market volatility and long term inflation. The currency volatility, which has been reflected in the depreciation of the Pound against the AUD (and other currencies), will affect pension payments of both DB and DC schemes. Specifically the purchasing power has now decreased for anyone spending in other currencies and to highlight this we have included the 12 month GBP rates against the AUD and USD.
GDP/AUD (1 Year)
Source: OFX 2016
GBP/USD (1 Year)
Source: OFX 2016
Market volatility, highlighted by the initial fall in value in global markets, has meant that anyone with an invested DC scheme has been hit with a market devaluation, (in addition to the currency devaluation). This market volatility does not apply to defined benefit schemes as they are not market linked.
The other impacts for Defined Benefit Schemes could occur over the longer term. This relates to the performance of the British economy and the flow on effects of interest rates and inflation. If the British economy suffers due to Brexit, and inflation is stagnant, DB pension payments that are inflation linked will also remain stagnant. If a client then spends in another currency, and that currency has a higher inflation outlook, then there might be longer term erosion of purchasing power. But purchasing power aside, an even larger flow on effect of sustained poor economic conditions could potentially impact the actual solvency of Defined Benefit schemes themselves. This could have catastrophic effects if the issue is ignored and public policy did not address it before it became endemic.
UK State Pensions
I believe that Brexit will affect the UK State Pension on a couple of fronts: through currency volatility in the short term, and performance of the British economy in the medium to longer term.
As with the Private Pensions above, we are seeing the short term currency volatility affect UK State Pension. For anyone who is retired in Australia, and therefore spending in AUD, any depreciation of the Pound will decrease their purchasing power. This is not a pleasing prospect for anyone relying on their UK pension as a significant portion of their fixed retirement income.
The potential medium to longer term implications are in relation to the performance of the British economy, and could create State Pension issues on two fronts:
- the continued non-indexation of pensions, and
- the future level of the UK State Pension for new applicants.
The non-indexation issue has been fought at the highest levels of the EU and still the situation remains the same; if you live in Australia (and a range of other countries), when you are eligible for the UK State Pension, it is not indexed for life. If the British economy falters as a result of Brexit, where there is little political will to proceed with indexation now, a poorly performing economy will make the argument for indexation almost impossible.
A poorly performing British economy could also put pressure on the affordability of future UK State Pension entitlements. Pension entitlements are legislated, and if the British economy is suffering due to Brexit which many predict it could, then there is a chance that future UK pension entitlements might be lower than otherwise expected.
For any clients who have UK private pensions – be those either Defined Contribution of Defined Benefit – bdhSterling can assist you with unbiased advice on what your options are with the looming Brexit.
There is no cost or obligation for any initial meeting but a catch up with an adviser is a good way to assess your options and get you to a position to make an informed decision.
If your concern relates to currency, we recommend that you speak to a currency broker who can advise you on strategies to minimise currency risk. Please contact us if you would like a recommendation to a panel of FX traders that we use.
Although bdhSterling does not advise clients on UK state pension entitlements internally, we can refer clients with UK state pension queries to:
British Pensions in Australia
1300 308 353
They are a well-respected organisation that can assist with any queries regarding National Insurance (NI) Contributions or entitlements.
It won’t happen overnight . . .
Assuming that Brexit does happen, as there is some commentary now to the contrary, that any exit will take time. Once the Lisbon Treaty is invoked by Britain, there is still a two year exit period. That’s a long time to be dealing with sleepless nights and financial uncertainty . . .
So avoid the bees, Keep Calm and Get Brexit Advice!
Simon Barwick is Managing Director of Australia branch and joint founder of bdhSterling with more than 15 years experience in financial services.