What will happen to my pensions and investments after Brexit?

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It’s now just a matter of weeks before the UK leaves the European Union. Over the past four and a half years there have been plenty of twists and turns, and whether the government manages to get a deal ratified or not, the impact of the UK’s departure will be felt across the economy.

A recent survey by consumer group Which? found that more than half of people with pensions and/or investments are worried about how their savings are performing. So, as the Brexit transition deadline approaches, are they right to be concerned?

What happens on 1 January 2021?

On 1 January 2021, the UK will leave the European Single Market and Customs Union. The two parties will then implement an independent trade policy which will usher in major changes to trading arrangements between Britain and the EU.

At the time of writing, a deal between the UK and EU is yet to be agreed, with issues such as fishing rights and trade continuing to divide the parties.

What we can say for certain is that, once the transition period ends, there will be significant changes regardless of whether a deal is reached or not.

How will Brexit affect your pensions and investments?

On 24 June 2016, the day after the EU referendum, the FTSE 100 and FTSE 250 fell around 9% and 12%, respectively, in the first half of the trading day.

Since then, the stock market has largely recovered – at least before the impact of Covid-19 hit share prices in the early part of 2020.

The issue with Brexit is that the uncertainty is bad for investor confidence. Companies can’t easily forecast their future earnings as much of the impact of Brexit is either hard to predict or yet to be felt. That makes investing somewhat risky as it’s hard to predict how individual businesses, industry sectors, and the overall economy will fare in 2021.

If there is continuing concern that the UK will be harmed by Brexit, there’s a chance this will be reflected in the price of UK shares. However, it’s important to remember losses are often short term.

While both Brexit and Covid-19 may push down UK markets – and may continue to do so – markets tend to recover eventually. Consider the calendar-year returns for the FTSE All-Share Index over the past 30 years, as shown in the chart below.

Source: Vanguard

You’ll see there have been eight years during this period where returns were negative. They include the ‘dot-com’ bubble of the late 1990s and the global financial crisis of 2007 (note that the index rose slightly in the year of the Brexit referendum result!). Overall, however, the average annual return over the whole period is 9.9% – even taking some sharp declines into account.

It’s therefore important to remember that investing is for the long term and that you should stick to your financial plan. Trying to dip in and out of markets during volatile periods – such as those caused by Brexit – can often be counter-productive.

Take this example from the US. Fidelity looked at how USD 10,000 would have grown had you invested it in the S&P 500 Index from the start of 1980 to the end of 2018.

Source: Fidelity. The hypothetical example assumes an investment that tracks the returns of a S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. “Best days” were determined by ranking the one-day total returns for the S&P Index within this time period and ranking them from highest to lowest.

If you had left your USD 10,000 (around AUD 13,660) invested throughout that entire period, it would have been worth USD 659,591 on 31 December 2018 (around AUD 901,265).

If you had pulled your money out of the market and you had missed just the best five days in the market during that 38-year period, your total investment would be worth USD 427,041. You would have sacrificed USD 232,550 (more than AUD 317,500) simply by being out of the market for five days.

If you had missed the best 30 days between 1980 and 2018, your USD 10,000 investment would be worth just USD 125,094 (around AUD 170,920) on 31 December 2018. You would have sacrificed USD 534,497 of gains – around AUD 730,300 – by being out of the market for just 30 days.

As the old adage goes: “it’s time in the market, not timing the market”.

Diversification is key

Diversification is another factor that can help you mitigate the impact of Brexit on your pensions and investments.

On a very simple level, and depending on your financial plan and goals, some of your money should generally be invested in more ‘volatile’ assets such as equities, and some should be invested in ‘safer’ assets such as bonds or cash.

As well as diversifying in terms of asset class, it’s also important to consider geographical diversification.

James Norton, senior investment planner at Vanguard, says: “So although the UK and European markets are likely to be impacted either positively or negatively by the Brexit outcome, any impact is likely to be much smaller in the US and emerging markets [a market that has some characteristics of a developed market, but doesn’t fully meet its standards].’

Ensuring your portfolio is diversified globally will also mitigate any local impact Brexit might have.

What about the UK State Pension?

Following the referendum result, there was much uncertainty as to how the UK State Pension would be paid to UK pensioners living in the European Union.

The government has now pledged that UK pensioners who are living in the EU will continue to receive annual rises to their State Pension after Brexit is concluded. The Department for Work and Pensions has confirmed that UK nationals now living in the EU will get their State Pension uprated every year for as long as they continue to live there.

If you’re an Australian and you have paid enough National Insurance contributions to qualify for a UK State Pension, this could apply to you if you move to the EU in the future.

Note also that you can have your UK State Pension paid to you if you move back to Australia, but you will not receive an annual increase.

Get in touch

As a cross-border financial planning firm with offices in both the UK and Australia, we’re uniquely placed to help you with your financial and pension arrangements. Get in touch to find out how we can help.

Please note

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.