Will your retirement plans withstand Brexit fears?
With the full force of Brexit yet to be felt, those who are saving for retirement need to be wary of the potential impact on their plans.
While markets have remained resilient following the initial shock of the Brexit vote, the International Monetary Fund (IMF) has cautioned that the impact of the decision to exit the European Union has continued to weigh heavily on the wider economy.
“The employment rate has remained around record highs, but the sharp depreciation of sterling following the referendum pushed up consumer price inflation, squeezing household real income and consumption,” it said, having downgraded its growth forecasts for the UK earlier last year.
The IMF’s report comes after the Bank of England warned that Brexit was having a “noticeable impact” on the economic outlook and that the UK’s split from the European Union will probably hamper productivity and slow growth.
“Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures,” it noted in its November Inflation Report.
Amid this uncertainty, there are concerns about what knock-on effects an economic downturn could have on savers’ retirement strategies.
Inflation above target
This year, inflation is expected to fall gradually but stay above the 2% target, implying further pressure on incomes and consumption. However, these projections assume continued progress in Brexit negotiations. A breakdown in talks would inevitably be a major impediment to the pound’s recovery, potentially creating a cost of living crisis.
There are fears that Brexit-related inflationary pressures and stagnating wages could deter workers from staying in their workplace pension scheme. Automatic enrolment has been a real success in helping workers save for retirement, but there is a risk that progress could be significantly undermined.
“You’d have more and more employees who’d be saying, ‘Can we really afford to opt in, when there’s a spike on the impact of how much we’re taking home, and our expenses?’,” says Gina Miller, the pro-EU campaigner who was behind the successful High Court Brexit challenge, which was upheld by the Supreme Court in January last year.
Experts also fear that an economic decline could put pressure on the pension system generally, as lower incomes and redundancies brought about by Brexit lead savers to make greater use of their pension freedoms.
“People who lose their jobs before retirement age, and are without substantial cash reserves, might be tempted to draw more from their retirement pots or access their savings earlier than anticipated,” says Ian Price, divisional director at St. James’s Place. “If they draw down too rapidly on their pension assets, they risk running out of money in their 70s and 80s.”
Against that uncertain backdrop, pension savers need to take a long-term approach and assume that there will be some volatility and inflation.
“It’s still too early to say whether Brexit will be good, bad or indifferent for the UK economy,” says Price. “However, a detrimental economic impact is likely to lead policymakers keeping interest rates lower for longer.”
“This will mean lower annuity rates, making a fixed income less attractive; and bigger company deficits, which could eventually impact on the ability of some final salary schemes to meet future pension payments. It’s therefore vital that individuals review their retirement plans frequently with their financial adviser.”
Price stresses that the best investment strategy for pension savers is to diversify their portfolio as widely as possible, to provide the best counter to the threats of short-term volatility, currency fluctuations and inflation.
“With the right asset allocation, you can manage risk in the long term and ensure your retirement plans are brought closer to fruition, regardless of political factors,” he adds.