A productive performance from the best pension funds
Pension funds had a strong year in 2016. According to research from financial data experts Moneyfacts
, the average fund finished the year up 15.7 per cent – the strongest performance since 2009. The improvement on the year before was significant, as in the previous 12 months the average fund grew by just 2.6 per cent.
Brexit was at the heart of that improved performance, with stock markets benefitting from the falling value of sterling. That has encouraged foreign investment, driving the FTSE 100 to hit new record highs repeatedly over the past year, which is good news for pension savers, with improved stock market performance translating into more significant pension pots for their retirement
Richard Eagling, head of pensions and investments at Moneyfacts, said in a statement: ‘For all the economic and political uncertainty that 2016 brought, it will be remembered as a productive year for the performance of most pension and drawdown funds.'
Triple lock is safe... for now
Back in the days of the Conservative-Liberal Democrat coalition government, a ‘triple lock’ was introduced to ensure that the state pension increases in a meaningful way each year. It stipulates that the state pension will increase by the largest of the following three figures on an annual basis:
- The best rate of inflation
- The rate of wage growth
- 2.5 per cent
Time appeared to be up for the triple lock this year, with the Conservative Party pledging to replace it with a ‘double lock’ from 2020, keeping increases tied to inflation or wage growth, even if they fell below 2.5 per cent. This pledge was made in its election manifesto, an election the Prime Minister said she had called in order to improve the chances of a successful Brexit process.
However, this was dropped as part of the Conservatives’ ‘supply and confidence’ arrangement with the DUP, suggesting that it will remain for the rest of this Parliament at least.
How are expats affected?
According to figures from the UN
, there are currently around 1.3 million British expats living in Europe.
Under the existing rules
, retirees living in countries within the European Economic Area are entitled to see their state pension increased each year in line with the triple lock. It is unclear at the moment whether exiting the EU will mean the end of this arrangement, unless the UK is able to negotiate reciprocal arrangements with individual EU nations.
Retirees will still be entitled to the state pension they have built up, but it may be that those pension payments are frozen. This would mean that in real terms the value of those pensions would fall each year, as a result of inflation. It’s important to remember that this has not been fully clarified as yet.
Defined benefit, or final salary, pensions are based on an arrangement between employer and employee. As a result, they should not be affected in any material way by Brexit, while there is no impact on the structure of defined contribution pensions either.
What does it mean for expats who have a private pension? A ‘No Deal’ Brexit could mean that private UK companies have problems paying out, say, an annuity to a UK citizen in the EU. There could be cost issues, and the question of exchange rates for companies transferring money . The Association of British Insurers (ABI) states that this issue can be solved by a 'cooperation between EU and UK regulators' . If this were to happen, expats can continue to draw out their private pensions without issue.
Interest in defined benefit transfers
Over the past couple of years, interest in transferring out of a defined benefit pension into a defined contribution pension scheme has increased. The main reason for this is the introduction of the pension freedoms, which allow pension savers greater choice over just how they can access and use their pension pots once they reach 55.
However, another factor making this sort of transfer more appealing is the transfer value savers can get for their pension. According to the Xafinity Transfer Value Index, a typical defined benefit scheme member entitled to a £10,000 annual pension could have got £210,000 as a transfer value for their pension in June last year. By early June, that had jumped to £241,000.
Brexit has played a part in that. Put simply, the cost of providing defined benefit pensions has jumped significantly since the vote, as returns from the gilts and bonds which employers rely on to pay those pensions has dropped over the past year. With life expectancy also rising, many employers are increasing the transfer values on offer in order to reduce their future liabilities.
It’s important to note that the transfer value is just one aspect that pension planners should consider when it comes to moving from a defined benefit to a defined contribution pension, and getting quality pension advice
State pension age changes
While not directly linked to the result of the Brexit vote, the state pension age has been brought forward. The state pension age had been set to increase to 68 in 2044. However, the government has brought that forward to between 2037 and 2039, meaning that around six million people will need to work for a year longer before they receive their state pension.
This change makes contributing to a pension even more important, particularly if you want any say over when you retire. In fact, the effects Brexit have had on pensions make it even more important for people to evaluate their pension savings now – and work out what they want from retirement.