Could Brexit kill your retirement dreams?
Experts warn of perfect pension storm with inflation, economic downturn and even new rules on exit penalties set to hit savers hard
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Your support makes all the difference.If the doom mongers are to believed, the UK’s inflation rate will hit 3 per cent within a year, taking with it the cost of pretty much everything. And that, financial advisers predict, is only the beginning of a growing number of issues facing pension savers that could have massive effects on their retirement income.
This week’s increase from 0.5 to 0.6 per cent certainly doesn’t sound like much, nor, says Mike Prestwood, head of prices for the Office for National Statistics (ONS), have we seen much of a Brexit effect yet on the cost of living – save the increased cost of importing goods thanks to a drop in the value of the pound.
But Nigel Green, CEO of deVere Group, one of the world’s biggest independent financial advisers, warns the increase heralds growing misery for already deficit-laden pension funds as well as the UK economy as a whole.
“We can expect inflation’s upward trend to gain momentum as the Brexit-battered pound’s depreciation really begins to take hold in 2017,” he says. “The black holes engulfing many company pension schemes are set to get even worse due to today’s increase in inflation. The funding gap is likely to soon reach £1tn.”
“More pressure is the last thing these schemes need. They have seen their deficits grow due to falling gilts following the Brexit decision and due to the Bank of England cutting interest rates to 0.25 per cent and boosting Quantitative Easing (QE) by £60bn, in an attempt to cushion the UK from a Brexit shock recession.
“Whether or not Brexit is good for the UK economy, [Brexit] has certainly been calamitous so far for pension schemes which were already suffering massively in markets which have been extremely difficult,” agrees Charles Cowling, a director at JLT Employee Benefits.
“This latest news must increase the likelihood of the Brexit effect bringing down some companies and their pension schemes. With pension benefits being linked to inflation, deficits will likely worsen further, adding pressure on trustees and companies alike.”
But the wider economic fallout of the Brexit vote is only one part of the perfect storm faced by those who have heeded the warnings and saved long and hard to retire on the income they hoped.
This week, for example, the Financial Conduct Authority (FCA) closes the consultation period on a piece of legislation that could cost savers thousands of pounds in early exit penalties on pensions, simply for getting their retirement date a little wrong when they first took out the contract.
While the FCA proposes a complete ban on early exit penalties for new contracts, anyone with an existing contract could still be charged up to 1 per cent of their fund value if they need access to the cash sooner – an administrative process that would arguably only cost the pension provider tens of pounds to implement., but could cost investors a total of £50m in penalties.
“For the vast majority of investors, the retirement date on their pension was agreed decades ago on an entirely arbitrary basis: no one in their 20s knows whether they’ll want to access their pension at age 55, or 60 or even 70, yet they are now going to be penalised for that,” argues Tom McPhail, head of retirement policy for Hargreaves Lansdown.
“For most people, even the state pension age will have changed between when they started saving and when they want to retire. With the introduction of pension freedoms in April 2015, there is now no longer any justification for applying these charges on investors who simply want to access their own savings.
“Any investors faced with a substantial exit penalty might be well served by delaying accessing their pension pot until next March [when the new rules are expected to come into force]. In the meantime, they can contact their pension provider and ask for a one-off deal to cut the penalty.”
It’s time to review that pension plan, and quickly.
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