Economic turmoil induced by the UK’s exit from the EU might tempt savers to draw from their retirement pots sooner, according to Gina Miller, founding partner at wealth manager SCM Direct.
Earlier this month, the Bank of England cautioned in its Monetary Policy Summary that “the decision to leave the European Union is having a noticeable impact on the economic outlook”.
Consumer price inflation measured at 3 per cent in October. The Monetary Policy Committee raised interest rates to 0.5 per cent from 0.25 per cent, in an effort to bring inflation back down towards its 2 per cent target rate.
Rising prices could actually see more and more people in retirement drawing down
Gina Miller, SCM Direct
Miller, who in January successfully challenged the government over its authority to trigger Article 50 without a parliamentary vote, warned that an economic downturn could have the knock-on effect of deterring workers from staying auto-enrolled.
Will savers be able to afford AE?
Miller has been a vociferous campaigner on Brexit. In the past, she has also thrown her weight behind efforts to improve transparency on fees and hidden charges in the fund management industry.
She told Pensions Expert: “The medium to long-term outlook is going to be one of uncertainty, and you would think that the investment committees and trustees are talking and looking at some scenario planning, or what they would do, for different outcomes.”
Auto-enrolment has been widely considered a successful means of helping workers to save for retirement. But the initiative is potentially under threat from Brexit-induced inflation, according to Miller.
In the event of a downturn, “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?’,” she said.
Lower incomes and redundancies brought about by Brexit could lead to savers making greater use of their pension freedoms. “Rising prices could actually see more and more people in retirement drawing down,” she predicted.
The Work and Pensions Committee is currently conducting an inquiry into the effect of pension freedoms, amid concerns over the susceptibility to scams of savers looking to transfer from their pensions.
Brexit may increase pressure on the pensions industry
In July, the International Monetary Fund downgraded its growth forecast for the UK to 1.7 per cent from 2 per cent, attributing this revision to Brexit.
Tom McPhail, head of retirement policy at platform provider Hargreaves Lansdown, echoed Miller’s view that economic decline could impact savers’ retirement strategies.
“If you see more people losing their jobs, as you expect in an economic downturn, that might put more pressure on the pension system generally,” he said.
Those out of work and without substantial cash reserves before retirement age might start looking to their pensions to provide them with an income at this point, McPhail said.
“That will have personal consequences for them later in life as they draw down too rapidly on their pension assets now. They might find themselves running out of money in their 70s and 80s, so there’s long-term economic consequences for UK plc,” he added.
Schemes are sufficiently diversified
As long-term investors, pension schemes are well protected from short-term market volatility. In this respect, savers should have less cause for concern over the impact of uncertainty over Brexit on their pension.
Steve Webb, former pensions minister and director of policy at Royal London, was sceptical over the impact of Brexit on scheme asset values.
“An amazingly small amount of money in pension funds is invested in UK equities,” he said.
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“Most of people’s money, in most pension schemes, is not invested in the UK markets… even if you accept the premise that Brexit leads to lower stock markets, the knock-on effect on pensions is [dampened] compared with perhaps a generation ago.”
Research by UBS Asset Management indicates that while an average of 53 per cent of scheme assets were made up of UK equities in 1997, funds held an average exposure of just 16 per cent in 2016.
“If you think that Brexit damages the economy, it’s more likely to lead to policymakers to keep interest rates lower for longer, and that feels to me a much, much bigger impact on the pension.”
According to Webb, this means “lower annuity rates, bigger company deficits [and] you have to save more”.
