Brexit and pensions: What impact will Brexit have on UK pensions?

The uncertainty surrounding Brexit and British expats finances, specifically regarding investments and pensions, is one of the most common topics that our financial specialists are faced with.

Since the vote to leave the EU in June 2016, nobody is really any clearer how and when the UK will leave the European Union. The previous deadline of 29^th March 2019 was extended to 31^st October 2019 – and while there is a lot of talk about whether the UK will leave via the withdrawal agreement or with no deal, the truth is that nobody really knows despite promises being made by politicians. It’s also possible that the UK may seek an extension of that deadline, or even revoke Article 50 and remain part of the EU.

While remaining an EU member seems highly unlikely, there are a number of key areas which expats have been seeking clarity including the UK state pension, personal pensions, defined benefit schemes and QROPS.

The information contained below is provided as a guide and must not be used as any kind of advice regarding your pension or finances. You must always seek independent advice before you make any decisions regarding your pension.

UK pensions payments for British expats living in the EU

Income received from private pensions for British expats in the EU

The potentially biggest risk surrounds private pensions that remain in the UK but are paying an income to a retiree in another EU country – specifically in the event that the UK leaves the EU without a formal withdrawal agreement (i.e. “no deal” Brexit).

Under any withdrawal agreement, it is likely that there will be a continuation of the existing scenario where a UK pension provider would be able to continue paying money into an EU bank account without breaching any rules.

However, under a ‘no deal’ Brexit UK pension providers would theoretically not be authorised to pay money into a EU bank account, which would mean they could be hit with fines and penalties. It should be added that this is a theoretical risk only as the UK government has already announced that EU pension payments into the UK would be allowed at least for the short term, and it is highly likely that the EU would reciprocate – although this has yet to be confirmed.

To counter this, some UK pension providers have already set up a subsidiary office within the EU to help them avoid this potential outcome, but it would likely mean that the money would need to be paid into a bank account located in the EU.

Before making any decisions, speak to your pension provider to establish what their plans are to mitigate any impact on pension payments into the EU, and if they are unclear, seek independent advice.

One potential way to avoid any issues is to get your UK pension paid into a UK bank account instead of an EU bank account. This will ensure that you receive the money and you will be able to transfer it to your EU bank account.

However, this also carries two potential issues. Firstly, if you have not lived in the UK for a long time and don’t have a UK bank account, you may have difficulty opening a new account.

Secondly, if you are transferring money from a UK bank account to an EU bank account, you will be exposed to extreme currency fluctuations that Brexit is likely to create and you may also see your money hit with additional charges that could diminish your income further.

Income received from the UK state pension by British expats living in the EU

There is generally better news for British expats living in the EU receiving the UK state pension as it is expected that there will be no hinderance to payments, irrespective of how the UK leaves the EU. This means that whether you receive the money into a UK bank account or a bank account in the EU, your payments should continue unhindered.

The major impact will likely come from exchange rate fluctuations that are likely to occur in the event of a ‘no deal’ exit where the pound is expected to lose value against the Euro meaning that the real value of the state pension will be reduced for British retirees living in the EU.

Unfortunately, there is no real way to mitigate this and it is important that you start to plan for worst case scenarios where your income could be reduced by between 10% and 20% in the event of no-deal. Again, this is only precautionary and is not a certainty by any means but will ensure you are prepared for the potential drop in income.

The other potential impact of Brexit and the UK state pension is whether or not the income will continue to rise in line with the cost of living under the current arrangement, or whether it will be frozen as it is for retirees in Australia, Malaysia and Canada (amongst other countries). It is anticipated that there will be no change to the current agreement but it is worth staying up to date by following the information on the official UK Government website: https://www.gov.uk/guidance/uk-nationals-in-the-eu-benefits-and-pensions-in-a-no-deal-scenario

Please note that introductions requested through Experts for Expats will not be able to provide advice around the UK state pension so you would need to speak to the International Pension Centre directly: https://www.gov.uk/international-pension-centre

How to mitigate issues with extreme currency fluctuations

One way to reduce the impact of potentially extreme, but (probably) short-term currency fluctuations directly affecting your income is to use an online currency broker that offers various benefits compared with simply transferring money from bank account to bank account.

Firstly, you can hold any pension income within the account and transfer to your Euro bank account without incurring additional fees for currency conversion.

Secondly, if you wanted to take advantage of a specific exchange rate, you can set up automatic payments to transfer money when that exchange rate is reached. This means that you can always be sure that the income you receive is in line with your own expectations.

If you would like to speak to a currency expert about the options available that can help mitigate some of the risks associated with Brexit:

Request a free introduction to a currency specialist from our network >

Impact of Brexit on UK pensions

To date, the decision to leave the EU has had several significant impacts on UK pension schemes and while the general mood of British expats is that it’s all negative, for the value of pensions the result has actually been relatively positive.

Performance of private pensions

Due to the devaluation of £GBP the attractiveness of the FTSE100 to foreign investors meant that in the immediate aftermath of the vote to leave the market hit an all time high. For pension funds with investments tied to the FTSE this was great news and saw their performance leap in 2016.

While the general performance since has stabilised, a no-deal Brexit could see £GBP lose further value and once again the performance of the FTSE100 is likely to improve, although the extent to which is completely unclear as the overall performance of the UK economy is also expected to be significantly affected – especially if tariffs and borders mean that the UK economy enters a recession.

Transfer values of defined benefit schemes

At Experts for Expats, in the past few years we have seen an increase in the number of people seeking guidance about their defined benefit schemes and establishing whether it may be prudent to transfer funds into a different scheme.

This has been driven by a rise in the transfer value of such schemes which has risen due to fall in returns from gilts and bonds since the vote to leave. This in turn has increased the costs of providing a DB scheme. Combined with the gradual increase in life expectancy, the transfer value of some DB schemes has seen rises in excess of 10%.

Whether this is likely to remain the case is unclear and while the transfer value of your DB scheme may have increased, there are several other factors that must be taken into consideration regarding the best course of action regarding your pension.

Only a qualified and authorised advisor will be able to give you full advice regarding your DB scheme and a proper investigation will require formal advice which is likely to be provided on a fee-basis only.

If someone is offering you formal advice without charge, you should be highly sceptical of their intent and seek a second opinion if you are in any doubt.

Brexit related pension scams

No article about pensions would be complete without considering the scams that some firms have been using to scare British expats into making quick decisions that will likely be expensive and ill-advised.

One such scam used combines several of the potential risks highlighted in this article, but rather than suggesting they are potential impacts which should be planned for and in no-way a certainty, some unscrupulous “advisory” firms are positioning them as certainties.

For example, we have been made aware that one firm has been actively targeting British expats that are yet to begin drawing an income from their UK pension pots and telling them that if they don’t transfer the pension out of the UK, they will not be able to access the funds after Brexit – and they must transfer to a QROPS or other non-UK scheme before the UK leaves the EU.

This is simply not true, and a scam designed to get expats into expensive pension transfers with schemes that provide the salesperson with high commissions. While there are protections in place within the UK and the EU to try and prevent such mis-selling, the best course of action is to seek independent advice from an alternative firm who will be able to review your situation and the potential risks proposed.

As ever, you should always be highly sceptical about any unsolicited “advice” that has been provided to you and never sign any contracts until you know exactly what you are agreeing to or be 100% certain of the fees/charges/commissions involved.

The only certainty is that the future is uncertain

Unfortunately, until it is certain how and when the UK will leave the EU, there is virtually no way to predict what the future holds. And such an environment means that making snap decisions about something which will affect your financial situation in the short and long term is a very bad idea.

If you are in any doubt as to what you should be considering, or if you have any concerns about any aspect of your finances or financial situation, your best course of action is to seek advice from an independent financial advisor.

While they also will not be able to predict the future, they will be aware of any changes, new rules or potential issues arising as a result of Brexit and will be able to provide advice you can trust.

During a time of economic and political turmoil you should only make decisions when you have all the information available and fully understand the risks of all the options available to you.