The UK pension deficit hit a record level of £935 billion following UK’s vote to leave the EU, likely hitting pro-Brexit voters the hardest.
Support for the UK to leave the EU bloc grew with each age category, peaking at 60 per cent among those aged 65 and over, according to a survey of 12,356 referendum voters by Lord Ashcroft.
Ironically, the same voters are reliant on defined benefit pension to deliver their retirement income.
But UK’s pension deficit rose from £830 billion to £900 billion overnight following the EU referendum.
The vote then pushed the gap further to £935 billion as of July 1, according to Hymans Robertson, an independent pension’s consultancy, making it responsible for £115 billion of debt.
Gilt yields, the assets used to help value the cost of future payments, tumbled in the aftermath of the June 23 referendum, as investors bolted in favour of assets with a reputation for safety, putting more pressure on the pension industry.
Record lows in gilt yields in turn pushed the liabilities of UK pension schemes up to an all-time high £2.3 trillion on July 1.
“The gyrations in UK pension deficits are eye-watering. But one of the biggest factors that will determine whether or not pensions are paid to scheme members in full will be the health of the sponsoring company post Brexit,” Patrick Bloomfield, partner at Hymans Robertson, said.
Ros Altman, the former pensions minister, warned pensions could be under threat from the economic turmoil following UK’s vote to leave the EU.
“Good pensions depend on a good economy. Markets don’t like uncertainty, and we are clearly in unchartered territory,” Altmann said at an event in London.
“I hope we will get the political turmoil settled soon and do what we really need to be doing -which is making good policy for everyone in the country – who hopefully one day will be a pensioner if they aren’t one already,” she added.
As British businesses struggle to plan for an uncertain future in the aftermath of Britain’s decision to leave the EU, a worsening funding gap can reduce their scope to borrow money, curb their ability to invest and act as barrier to mergers and acquisitions.
Sir Philip Green’s account of the BHS pension crisis is not credible
High profile companies Tata Steel and BHS already showed evidence of the impact of pension deficits on investments and deal making this year.
The British Steel pension scheme, backed by Tata, has an estimated deficit of £700 million which has complicated the quest to find a new owner for Tata’s factories.
BHS’s pensions scheme had a £571 million hole when it collapsed. The risk of taking on the pensions burden is thought to be one of the reasons behind BHS’s failure to find backers or buyers for the business as a whole.
U.K. pension deficits surged by 100 billion pounds ($131.4 billion) in August, as the gap between company set-asides and their obligations to retirees ballooned by more than 16 percent in a month.
So-called defined benefit pensions, which pay retirees fixed amounts based on service, were underfunded by 710 billion pounds as of Aug. 29, according to PricewaterhouseCoopers LLP’s Skyval index, published Thursday. The index tracks about 6,000 defined benefit schemes in the U.K. Should the deficits persist, companies could be forced to slash dividends as they increase their pension contributions to plug funding gaps.
“There’s a cash availability issue for sure,” Raj Mody, global head of pensions at PwC said in a telephone interview. “If companies generally are having to pay more in their pension schemes in cash terms, that might mean they’ve got less to pay to their shareholders in dividends.”
Pension deficits have swelled since the U.K. voted to leave the European Union on June 23. Following the referendum, the Bank of England boosted stimulus to protect the U.K. economy, pushing government bond yields to record lows and reducing returns on fund investments.
Companies shouldn’t ignore the impact on their pension funds, Mody said.
“It absolutely needs to be taken very seriously because the situation is worse than it has been,” Mody said. “Every individual scheme out there needs to catch up with what its situation is, what has happened to its funding position. More likely than not it will have to take more proactive action than it was ever expecting to do.”
Mody expects further action from the Bank of England too, as it seeks to reassure participants in the British economy in uncertain times. Half of the country’s pension funds haven’t hedged against further declines in long-term interest rates, he said. “The challenging environment for pension funds is likely to endure for several years,” Mody said in a statement.
The deficit has already started to bite. Carclo Plc, a maker of plastic components for technical and consumer products, said on Wednesday that it’s unlikely to pay a planned dividend of 1.95 pence per share on Oct. 7. The West Yorkshire, U.K.-based company projected a “significant increase” in its pension deficit unless corporate bond yields recover by the end of September.
Shareholders in large firms could also feel the effects. Telecom carrier BT Group Plc said in its annual report in May that “higher deficit payments could mean less money available to invest, pay out as dividends or repay debt as it matures.”
A fund run by Woodford Investment Management LLP sold its stakes in both BT and BAE Systems Plc, Europe’s biggest defense company, citing pension concerns. Woodford’s head of investment communications, Mitchell Fraser-Jones, wrote in a blogpost last week that “concerns about their pensions has reduced the level of conviction that we have in stocks such as Royal Mail, BT and BAE Systems.”
Consultancy Hymans Robertson, which found last month that the deficit among U.K. companies had increased to 1 trillion pounds, said quantitative easing had caused costs for defined benefit schemes to spike over 50 percent of pay for many of them, which “simply isn’t sustainable.” Just two FTSE 100 companies are still offering new hires access to such plans, according to consulting firm Lane Clark & Peacock.
Economists in a Bloomberg survey in August predicted the BOE would once again cut rates in November. This would likely depress yields on the benchmark 10-year gilt, which hit a record low of 0.501 percent on Aug. 15, even further.
Meanwhile, BOE Chief Economist Andy Haldane sparked controversy last weekend when he suggested in an interview with the Sunday Times that buying a home was a better investment than a pension.
“It ought to be pension but it’s almost certainly property,” Haldane told the newspaper.
A final salary pension scheme has long been regarded as the gold-plated route to a comfortable retirement. But since the Brexit vote, some financial advisers and their clients are thinking the previously unthinkable. With cash transfer valuations hitting record highs, it seems there has never been a better time to cash in.
On the whole, Brexit-related market turbulence has been bad news for pension savers nearing retirement who are seeking a secure income. Since the end of June, annuity rates have plunged to new lows and company pension deficits have ballooned, both casualties of the market storms triggered by the UK’s decision to quit the EU.
Yet members of traditional company retirement schemes are experiencing a “Brexit bonus”, in the words of one adviser. In a less well-publicised development, offers made to some savers to cash in their “defined benefit” pension, also known as final salary or career average, have reached new highs since the June referendum.
This side-effect of Brexit-related market volatility has led some transfer valuations — the offers made by pension schemes to swap future income for a cash lump sum — to increase by tens of thousands of pounds in months.
In some cases, cash sums equivalent to more than 30 times the projected annual income on retirement have been offered to pension scheme members. Advisers are revisiting past transfer recommendations as the offers on the table have become more enticing.
But the development is sparking concerns that savers, dazzled by the prospect of such a huge cash windfall, could be tempted to make decisions they will regret later.
Deals get sweeter
About 15m people are members of defined benefit pension schemes, run by some of the country’s biggest private sector employers as well as the public services.
Unlike the riskier workplace pensions offered to most people today, defined benefit pensions promise to pay a guaranteed income for life, based on a final, or career average, salary.
The income rises each year with inflation, and will continue to be paid to a surviving spouse or civil partner — typically two-thirds to half of the original policy.
While most people take the company pension when they retire, many in the private sector (and some public sector workers) can request to take their pension entitlement as an upfront lump sum instead.
Since the Brexit vote in June, these “transfer valuations” made to those who want to swap a future final salary pension for cash upfront have jumped a 10th, say advisers. With some offers improving by tens of thousands of pounds over a matter of months, those in final salary schemes approaching retirement are considering whether it makes financial sense to cash in the pension now.
“Transfer valuations in general are about 5 to 10 per cent higher than they were before the Brexit vote,” said James Baxter of Tideway, the final salary pension transfer specialists. “This summer is showing us the highest transfer offers ever made. It is looking like a Brexit bonus.”
Mr Baxter says in one recent case, a 60-year-old member of a large energy company’s pension scheme experienced a 12 per cent “Brexit boost” to his defined benefit transfer offer.
In March he was offered a transfer value of £1m for an expected annual pension of £31,000 linked to RPI (capped at 5 per cent) that came with a 50 per cent widow’s pension. But just four months later, in July after the Brexit vote, the same valuation had risen 12 per cent to £1.12m.
“Many people are quietly shocked by the revaluations they are getting,” said Mr Baxter.
Others concur with his view that there has been a “Brexit effect” on valuations. “I had a client who had requested a transfer valuation prior to Brexit and it was £1.7m,” said Gary Smith, financial planner with Tilney Bestinvest, the independent advisers. “However, after Brexit he requested another valuation and it was £85,000 higher. This guy was very financially astute and was acutely aware that it was worth revisiting his transfer valuation after the EU vote.”
Revisiting past advice
Over the past year, the number of individuals exploring cashing in their final salary pension entitlement has increased, largely due to reforms that have given millions of savers freedom to spend their pension funds as they wish. But in many cases, those seeking a professional opinion on whether they should cash in have been advised to sit tight in their scheme.
However, the recent improvement in transfer values is leading some advisers to revisit past recommendations. “I have actually tasked our pension specialist to look at all final salary cases where we have recommended a ‘No’ in the past 18 months,” said Richard Lord, chartered financial planner and managing director of Bartholomew Hawkins, chartered financial planners. “We are both of the same opinion that values will increase. Our advice may change on some of these.”
Mr Lord cited a recent example of a client whose £540,000 transfer value, quoted three years ago, had increased by 50 per cent. “They received a new statement at the start of this year where it had increased to £740,000,” he said. “We then requested a further value in May and it was £818,000.”
Savers who opt to transfer their final salary pensions should also be aware of the tax implications. When you reach your scheme’s pension age, a quarter of a transferred pension can be typically taken tax free. Assuming the remainder of the pot is held in drawdown, you will be taxed on whatever you take from it, as income or a lump sum, at your marginal rate.
The link to gilts
So what has prompted the sudden rise in transfer valuations? The key driver has been the sharp fall in AA-rated corporate bond yields, which in turn track 15 to 20-year gilt yields. These yields are what many defined benefit pension schemes use to value their future pension promises.
Pension schemes refer to these yields to produce a Cash Equivalent Transfer Value (CETV) in today’s money on the future pension benefits a member has accrued. When gilt yields and corporate bond yields fall, the cost to the scheme of paying for future pension promises rises. So, theoretically, the cash sum you are offered today for your future pension could also rise.
Punter Southall, the consultants, estimate some transfer valuations are about 80 per cent higher than they were in 2012, and 25 per cent higher than the past year, mirroring movements in gilt yields (see graph).
But those obtaining CETVs today are seeing spikes in their valuations compared with just a few months ago as gilt yields fall to record lows in the aftermath of the EU vote in June.
“Based on our experience, and considering current conditions, it is highly likely that transfer value factors are at record levels,” said Deborah Cooper, a partner at Mercer, the pension consultants. “UK gilt yields are at their lowest-ever level. This means that transfer values per £1 of pension are likely to be at record levels.”
When discussing transfer valuations, advisers refer to a rule of thumb calculation known as the “multiple”, which is how much £1 of the expected defined benefit pension will convert into cash.
Up until a year or 18 months ago, income multiples of 20 were the norm. This meant that if you were projected to receive a £10,000 a year pension, you might expect a £200,000 lump sum if you swapped the income for cash upfront.
However, these multiples have shot up to more than 30 in some cases. “I have a client who was offered [a] £116,000 lump sum for a £3,500 pension, which is a multiple of 33,” said Mr Smith of Tilney Bestinvest. “This is the highest I have seen. Prior to that the highest I had seen was around 30 times.”
Will transfer offers go higher?
Given the effect that plummeting gilt yields are having on final salary cash transfer offers, many will be wondering if the trend will continue.
“Never say never,” said Ms Cooper of Mercer. “Although gilt yields imply that interest rates in future will increase, it is still possible they could get lower.”
Robert Briggs of Briggs Murray Actuarial, which specialises in pension transfers, agreed that valuations could go higher in theory if long-term yields from fixed interest investments went lower. But he cautioned that each scheme actuary would be taking a long-term view and the CETVs generated “may not reflect this” for many schemes.
“In the current transfer market, we consider Brexit volatility will have far less impact on scheme members than actually having the correct information for comparison purposes,” he added.
Once a transfer valuation has been issued, it is valid for three months, after which the member will need to apply for another quote.
Exceptions to the Brexit bonus
It is not a given that all pension schemes will pass on a Brexit bonus to leavers, particularly if the scheme is poorly funded.
“Each scheme actuary has their own views and ‘assumption sets’ — which forms the basis of the CETV calculation,” said Mr Briggs. “As the scheme actuary, they have the responsibility to ensure the basis is in the best interest of all scheme members — not just those wishing to transfer.”
Mr Briggs said the “majority” of CETVs his firm comes across were “not overly generous”. “However, some schemes are consistently less generous whilst others are more generous,” he added. The basis for CETVs was only set by the scheme actuary every three years and “infrequently changed”, he said.
But advisers say this contrasts with their experience of a Brexit uplift on quotes made shortly before and after the EU vote. They say some of the most generous transfer offers are cropping up in the financial services and insurance sectors.
I have a client who was offered [a] £116,000 lump sum for a £3,500 pension, which is a multiple of 33. This is the highest I have seen
“We’ve also seen big offers from the supermarket chains such as Tesco,” said Mr Baxter. “One bank was making the most generous offers we’ve seen, with some people getting cash offers of 34 or 35 times pension income.”
No alerts over transfer boost
The financially savvy and those who have hired a professional adviser may be aware of the benefits of revisiting past transfer valuations. But most members will not be aware if their position has improved.
This is because pension schemes are not obliged to tell their members if transfer offers have become more — or less — generous. That could be seen as encouraging members to take action when it is still viewed as best for most to stay in the scheme.
In spite of the spike in valuations, the Pensions Regulator says that for most members it is “still likely in current conditions to be in their best financial interests to remain in their defined benefit scheme.
“The provision of clear, timely information from trustees and the use of independent regulated financial advice should enable members to make informed decisions that suit their personal aims and circumstances.”
The government requires only those requesting to transfer a pension worth more than £30,000 to first obtain regulated advice. Savers with smaller transfer values are not subject to the advice requirement.
Irrespective of whether transfer values continue to climb, advisers say it is “vital” anyone considering cashing in a pension — regardless of transfer value level — understand what future benefits they might be giving up.
“The guarantees (including escalation and spouses benefits) that these schemes offer are invaluable for most people,” said Keith Richards, chief executive of the Personal Finance Society.
“But in our experience, there continues to be a high level of naivety as to the true value of a final salary scheme. Irrespective of transfer value levels, it is vital that specialist advice is sought because of the potential financial consequences in the long term.”
Theresa May will take over as the new Prime Minister of the UK. After what has been a very volatile few weeks in the UK, the FTSE 100 has performed well but the FTSE 250, which has a better representation of UK companies is somewhat lagging, down several percentage points on it’s pre-Brexit levels. This is mainly due to concerns over whether or not there will be continued investment into the UK or, as many have expected, this may well be directed to companies in more ‘EU friendly’ territories.
One area of concern has been the UK currency, which has seen significant drops against the USD and the Euro. It must be argued that this firstly comes as a direct result of the UK voting to leave but also due the uncertainty over who would fill David Cameron’s shoes as PM.
With May posed to take charge tomorrow here is hoping the UK markets remain stable but also a rally in Sterling vs the US Dollar.
The pensions industry has been significantly hit with many UK defined benefit pension funds going more and more into deficit as UK Gilt yields fall. This does however mean that people wishing to move their pensions out of these schemes could potentially receive superior transfer values to what they would have got pre-Brexit.
Never has there been a better time to consider reviewing your pension assets in the UK, to take advantage of all time high transfer values and see if moving your pensions out of the UK makes sense for you.
The United Kingdom have voted in favour of leaving the EU. This undoubtedly brings a wave of uncertainty and numerous questions that will remain unanswered for up to 2 years. What we do know is that GBP will devalue (already at its lowest levels since 1985) and that markets all around the world will drop significantly (initially). We also know that the need to cater for medium to long term financial and retirement planning remains a constant regardless of where you live.
One of the most pertinent questions people will be asking today is: “What will happen to QROPS?”. There is no immediate answer to this. The UK and EU have many, many bigger issues to deal with than the future of QROPS. The UK will remain in the EU for the foreseeable future and it will likely take around 2 years to negotiate its exit. There is a very strong likelihood that the transfer of UK pensions (out of the UK) will remain after the UK leave. However, there is also a possibility they are banned, or more likely have a tax applied on transfer – we will have to wait and see.
What is clear, is that we now have the biggest reason in QROPS history for expats to move their UK pensions. Many of the prospects we speak to like the idea of QROPS, but have decided to “wait until they are nearer to retirement” to move it. Or, “wait to see if the deficit is recouped”. They now don’t have these luxuries; they have to make a decision now if they want to benefit for the many advantages of QROPS.
It isn’t just the uncertainty around the future legality of QROPS that makes transferring now such a key time. The way the markets will react will have a profound and (likely) detrimental effect on defined benefit deficits.
We remain perfectly positioned to help and assist as many people as we can with their UK pension and the options of transferring it into a QROPS – we know this product better than anybody in the industry. In BREXIT, we probably have the biggest urgency creator the QROPS market has ever had. QROPS rely on EU legislation and if that legislation is no longer there it is likely the UK treasury will do it’s best to stop these transfers.
As with any disruption to the status quo, there will always be a degree of uncertainty, unease and nervousness, and in times such as these strong leadership and the ability to give direction and good advice will always allow you to rise above the chaos.
Contact us for help to understand what you are able to do with your UK pensions.
The real possibility that rules surrounding offshore pension transfers could change following the outcome of the UK’s EU referendum means advisers considering such a move for their clients may be wise not to delay, says Darren Jones, head of technical sales for Old Mutual International, part of Old Mutual Wealth.
Qrops were first introduced 10 years ago after EU legislation forced the UK to formalise its process of allowing people to transfer their pension to a different jurisdiction. Prior to this change, members had to gain HM Revenue & Customs approval on a case-by-case basis, a process that was complex and potentially lengthy.
Usually the receiving scheme was in the new country of residence and often employer sponsored. The member had to certify the permanency of leaving the UK and provide proof that UK work had ceased and new work overseas had commenced. Generally no pensions in payment could be transferred.
The Qrops market has grown significantly over the years. Qrops benefits include removing growth from future lifetime allowance testing, potentially reduced taxation on death of the member, no requirement to certify permanency of non-UK residency, potentially reduced taxation of income should the member return to the UK, currency flexibility, choice of retirement date and jurisdictional options to take advantage of favourable double taxation treaties.
The future of Qrops is very much dependant on what the UK government decides to do in relation to Article 50, and whether the UK will stay a member of the EEA. Market speculation around whether we will see a ‘closing down sale’ for Qrops is understandable, but it is perhaps more likely some modifications to the existing rules will be made.
“It is a real possibility the rules surrounding Qrops may change in the future, and advisers with clients considering transferring to a Qrops should encourage them to take action sooner rather than later.”
For example, HMRC may look to only allow members to transfer their Qrops to a jurisdiction where they live, removing the ability for members to select the most favourable jurisdiction to hold their pension.
Regulations in the frame
The government may also want to preserve the benefits Qrops brings to the pension system in today’s transient market place. Attracting offshore investment and entrepreneurs to the UK, and giving them choice and flexibility when it comes to their pension saving will remain a priority for the government.
The Brexit vote may well encourage advisers and their clients to focus on their financial planning needs and, if a Qrops is suitable, it would make sense not to postpone this decision. Once a member holds their pension inside a Qrops it is hard to see how HMRC can make any retrospective changes and, should client circumstances change, it is likely that a transfer back to a UK scheme would remain an option.
So what does this all mean? Qrops will still have a valuable role to play in helping bring flexibility and choice to the UK pension industry, especially in today’s transient market place. However, it is a real possibility the rules surrounding Qrops may change in the future, and advisers with clients considering transferring to a Qrops should encourage them to take action sooner rather than later to ensure they benefit from the current legislation.
It was pensions wot won it. That was the view of many commentators after Scots voted against independence in 2014.
Days earlier, ex-PM Gordon Brown had warned that an independent Scotland would put pensions at risk. And in the privacy of the polling booth, while younger voters gambled with a Yes vote, older voters plumped for the status quo.
Now the EU referendum looms, and many voters across the UK and beyond want to know how a Brexit could affect their hard-earned cash.
Younger voters need their pension savings to grow. Older voters cashing in their pensions need to make sure they can get a good deal that sets them up for retirement. And pensioners who retired abroad need to know what happens to their income.
We look at the main issues affecting pensions and what both the Brexiteers and Remainders say about them.
The risk to our savings
During our working lives, we are encouraged by the Government to save money into a pension. This is a special savings account, which is usually invested on our behalf.
While bosses used to promise a certain fixed pension on retirement – known as a defined benefit pension – most of us toilers now have to save into a defined contribution pension.
In short, this means that if there’s a financial crash and the value of our pension investments plummet, we’re left to pick up the pieces.
So for anyone still saving into a pension, the biggest threat from Brexit is a period of financial instability.
Thangam Debbonaire, Labour MP for Bristol West, said: “Leaving Europe would cause serious damage to our economy, affecting the pension funds on which millions of Britons rely.
“The head of Standard Life has said leaving would be disastrous. Equities and gilt markets would be hit, and the pound would fall, making private pensions worth less.”
It’s certainly true that fund managers are pulling out of UK shares – suggesting they are worried about Brexit wiping millions off their investments.
How important this is, though, does depend how old you are. If you’ve got 40 years of work ahead of you, Brexit could look as remote as the financial shocks of the 1970s look now.
On the other hand, if you’re nearing retirement, this could knock some stuffing out of your savings and you may not have time to get it back.
Cashing in on retirement
When you can finally cash in your pension from the age of 55, most people will try to set up some kind of regular income for the future.
The simplest way to do this is to use your savings to buy an annuity – a promise of a regular income for the rest of your life.
And for those trying to buy one immediately after a Brexit, there could be some good news.
Annuity rates are linked to the rates of fixed income investments like bonds. If the Bank of England was forced to hike interest rates in the wake of a Brexit, this could make annuity deals look a lot more appetising.
“We could see a rise in interest rates, and gilt and bond yields, and that could lead to an increase in annuity rates,” said Tom McPhail, Hargreaves Lansdown head of retirement policy.
But this could also be a Catch-22 situation, because a big financial shock could also wipe the value off your savings in the first place.
McPhail said: “If your pension has shrunk as a result of the Leave vote, you might have less money to buy an annuity in the first place.”
Annuity rates are rubbish, and those hunting for a good deal have little to lose in the case of a Brexit.
Still, voting to quit the EU for that reason alone is a bit of a stretch. There’s no guarantee interest rates will rise, and you’re putting your pension savings at risk.
Britain’s army of retirees rely on a combination of two income streams – private annuities and the state pension.
The state pension is guaranteed to keep rising, but it is also a prime target for political meddling.
The Government controls the state pension, and over the past few years it has been relatively generous with a promise to keep this rising by at least 2.5% a year.
At the same time, it has infuriated women born in the 1950s by delaying the age of the retirement.
Brexiteer MP and former Work and Pensions minister Iain Duncan Smith says leaving the EU is the only way to control what happens next.
He said: “After an aborted pensions power grab in 2013, EU politicians have signalled further plans to gain control of the UK’s pension system.
“Unless we take back control, unelected eurocrats and EU judges will be deciding policies affecting your pension.”
By contrast, retirees who have private annuities agreed a fixed income at the start. But while they don’t have to worry about politicians, they might have to worry about inflation.
The more prices rise, the less they can buy with a fixed income.
McPhail said this is the “critical question” for pensioners: “What will be the impact of leaving on the economy and inflation?”
The state pension is never going to be free of political meddling, so it’s up to voters whether they trust the EU or the UK’s main political parties to protect their interests more.
While it’s impossible to predict what would happen after a Brexit, today’s prices are based on a situation where we have free trade with the EU, and if that agreement collapsed, prices are likely to rise.
Brits who decided to spend their golden years in the sunshine have the same worries as pensioners in the UK, and then a few more.
IDS has dismissed the “scare stories” that retirees in the EU will be stranded: “State pensions are payable to British citizens who retire overseas, regardless of EU membership.”
But while bronzed retirees might still be able to get their state pension in Marbella, they may find they can’t buy quite as many ice-creams as before.
The pound has been crashing in recent months, and it could fall more.
McPhail said: “There is a broad expectation that in the short-term at least we would probably see a drop in sterling.
“For people who retired abroad this could mean any income they received from the UK would be less.”
Overseas retirees might also be denied access to local health and other services that are guaranteed to fellow EU members, in the event of a vote to leave.
One of the hazards of living abroad with a UK pension is that its value can go up and down. British pensioners may have experienced this before. Either way, it’s worth budgeting for a reduced income in the next few months.
British pensioners abroad may wish to look at the bigger picture, as the EU currently guarantees their right to permanent residence, visa-free travel and more.
When it comes to casting votes in the EU referendum on June 23, for most people it will come down to money.
Will their mortgage repayments be higher or lower? Will pensions and other investments rise or fall? What will happen to the value of sterling and the cost of their holidays overseas?
Unfortunately there are no certain answers to these questions, only a great deal of sound and fury.
The AA warned that family fuel bills would rise by £500 a year. Amber Rudd, the Energy Secretary, said energy costs could soar.
Sterling will collapse by 20pc according to analysts at Goldman Sachs, while stock markets are tipped to slide by up to 30pc, savaging pension and Isa investments.
But is the gloom overdone? Jason Hollands, a spokesman for the investment adviser Tilney Bestinvest, believes so.
He said: “The UK stock market is dominated by large international companies, whose performance is not closely linked to domestic UK issues. Markets don’t like uncertainty and there are real risks around. But the Chinese economy, US interest rates and oil-price movements are more significant risk factors.”
Laith Khalaf, a spokesman for Hargreaves Lansdown, the investment shop, added: “There may be some volatility in the lead-up to the vote. But if you are happy to be invested in the stock market you must be prepared to accept some volatility. If you can’t, then you shouldn’t be invested.
So far there has been little cause to panic. Stock markets have not gone into freefall since the date of the referendum was announced. Quite the reverse.
The FTSE index of Britain’s top 100 companies has risen from 5500 on 11 February and now hovers around 6096.
But investors are cautious. Research from The Share Centre found that a quarter of 1,500 Isa investors quizzed were opting for lower-risk investments, pointing to the uncertainties triggered by the EU referendum as their reason.
But is their caution justified? We examine the risks.
1. Impact on sterling
Sterling has fallen by 12.5pc against the euro, 6.8pc against the US dollar and 11.4pc against the Australian dollar since the debate took off last December. But economists’ expectations that interest rates will stay on hold until the middle of 2017, even if the UK remains in the EU, are also partly responsible for pushing the pound lower.
Peter O’Flanagan, head of foreign exchange at specialist risk firm Clear Treasury, is bracing for a sterling shock if Britain votes to leave the EU. He said: “UK trade will be affected in the short term, because we will have to renegotiate trade deals not only with EU countries but with other countries where we rely on EU trade deals. This will take time. Everything will stabilise in due course, but there could be short-term pain.”
Mr Hollands agreed, saying: “A vote to leave would be accompanied by a knee-jerk further sell-off in sterling. However, this may not be all bad. While it pushes up the cost of foreign holidays, it also makes the UK a cheaper destination for overseas visitors and makes our exports more competitive. There are two sides to every coin.”
2. Will markets fall?
Based on the experience of the Scottish referendum, markets largely ignore the chatter around the vote until the date gets closer or a credible poll shows a change to the status quo.
Billions were wiped off the value of Scottish firms after a YouGov poll predicted a narrow win for the independence campaign.
So what should investors do? Mr Khalaf said they should carry on as usual while making sure their investments were spread globally.
“After the vote, investors will still have the same need to invest for their retirement, for university fees for their children, and for the many other reasons they save now,” he said.
Actively run funds can help minimise any near-term impact with the fund manager fine-tuning portfolios in a way funds that track the market will not be able to.
“Absolute return” funds, in particular, aim to smooth market volatility. They sometimes use “short selling”, betting on falling shares, to achieve real returns each year, although many fail.
Tilney Bestinvest recommends a mix of funds, including some absolute return funds. Its tips include Threadneedle European Select, FP Argonaut Absolute Return fund, JPM Global Macro Opportunities, Threadneedle Dynamic Real Return and Invesco Perpetual Global Targeted Returns.
Fundsmith Equity is a favourite pick for a number of advisers, including The Share Centre, which also tips Woodford Equity Income and Old Mutual Global Equity Absolute Return.
Nicolas Ziegelasch, head of equity research at Killik & Co, the stockbroker, stressed the need to internationalise a portfolio. He said: “We are not encouraging investors with global portfolios to significantly change exposure to the UK, but rather just to remind investors who are solely exposed to the UK that there are a number of benefits to international diversification, especially in this time of high currency volatility.”
For US exposure, Killik recommends Findlay Park American, although this widely praised fund is not widely available.
3. How safe will my money be?
The Financial Services Compensation Scheme (FSCS) protects deposits of up to £75,000 per banking licence and £50,000 at investment and mortgage firms. However, compensation limits are harmonised across the EU.
If the UK voted to leave, it is likely these limits would continue for the time being. But over time they could be higher or lower than elsewhere in Europe.
4. Taxes, Isas and pensions
UK taxes and state pensions are set by the UK Government so no change is anticipated. Isas, too, are an exclusively UK product.
5. How will expats fare?
Expats who rely on UK income such as pensions will be affected by any currency swings. For example, £1,000 would have bought 2,100 Australian dollars last December, but is now worth only A$1,800.
The bigger worry for more than a million pensioners living in Spain is whether their state pensions will continue to be uprated annually.
The UK Government pays annual cost-of-living rises to all pensioners living in European Economic Area countries, so this should continue. But the Government recently made clear it did not intend to enter any new reciprocal agreements, so if a new arrangement was required then the upratings could be at risk.
Below is a basic map of the process one needs to undergo to transfer there UK pension scheme to a QROPS. In many respects the process is not very much different than transferring a pension to another UK scheme. The times are just a guideline based on a typical QROPS application, since many of the delays in that occur arise due to the time it takes for a UK pension provider to pass on information to your financial advisor.
You make an initial enquiry to a financial advisor
Your advisor sends you a valuation request form (sometimes called a letter of authority) to complete – so they can speak to your current pension provider on your behalf.
A Letter of Authority is an authorisation from you which allows your financial adviser to obtain information about your UK pension. This letter is not binding in any way and does not constitute an authority to make changes to or transfer the scheme.
You make an initial enquiry to a financial advisor
You email or fax the valuation request form to your financial advisor and send the original (sometimes just a scan or fax will suffice). Your financial advisor will forward this to your pension scheme provider, together with requests for any other specific information about your pension. Most financial advisors do not charge for this.
Your existing pension provider will provide your financial advisor with a statement of your current benefits and a transfer valuation.
Warning: If your pension is a final salary scheme financial advisor should obtain a pension transfer analysis report from a qualified third party pensions technician. This report calculates the minimum amount of growth your transfer value will need to achieve each year to match your final salary benefits. This figure is called the “Critical Yield” and it is actually pretty critical. If a financial advisor attempts to persuade you to transfer your pension without showing you a critical yield calculation this should set alarm bells ringing immediately.
Your financial advisor helps you choose a QROPS product and a jurisdiction that best fits in with your current situation or objectives and you complete the application forms.
A discharge form is sent to your existing pension scheme provider, and an application form is sent to the chosen QROPS provider.
Your pension is then transferred into the QROPS and you will instruct your financial advisor to invest the funds as per your agreed mandate. Although the above case is a great example of how quickly a QROPS can take place, this does not reflect every single case and time frames can vary. As mentioned in the first paragraph many of the delays are down to the pension schemes back in the UK.
Quite simply, a QROPS is a pension plan that; “Qualifies” with HM Revenue and Customs (HMRC) rules, is officially “Recognised” by HMRC, is “Overseas”, i.e. outside of the UK and is set up in trust as a legal “Pension Scheme”, hence the acronym. A QROPS therefore, can accept a UK pension transfer just like any UK based scheme. The benefits of transferring your fund into a QROPS include increased tax efficiency, flexibility, total investment freedom and large growth opportunities – to name just a few.
For most people, their pension is probably their second most valuable asset after their family home, so benefits really make a big difference, and can dramatically improve life in retirement.
Around 300,000 to 500,000 Britons leave the UK every year to start a new life overseas. The big demand for overseas pension benefits is the key reason behind the birth, development and refinement of QROPS and many thousands of expats have transferred their UK pension into a QROPS since the schemes were launched. Because of the potential benefits to be derived from transferring a UK pension abroad, this demand shows no sign of slowing.
The capacity for QROPS to simplify an individual’s retirement has assisted as well. With a QROPS, it is much easier to switch from out-of-date arrangements, and consolidate a number of pension schemes under one roof.