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Technical View

Breaking up is never easy to do

Pensions in a post-Brexit world

After the dramatic EU referendum result on 24th June, we have already seen huge change within the UK, David Cameron announced he would be stepping down, and we have a new Prime Minister in the form of Teresa May. The pound dropped to its lowest level against the US$, since the 1980’s and it feels like a different country to that of 23rd June. 

This Technical View looks at some of the possible implications for pensions that may be brought about by an exit from the EU.  We hope that you will find it useful in what may be some difficult conversations with your clients over the coming weeks.

Firstly, let’s talk about the now infamous Article 50.  This is the legislation, within the Treaty on European Union, which sets out the process for leaving the EU.  The UK government must give notice of intention to leave to the European Council.  Once this notice is given, the negotiation process can begin in order to put together a plan for extracting the UK from the EU and determining any future relationship between the two.  At present, although the EU has issued a statement urging the UK to trigger article 50 as soon as possible, there is currently no power under any EU treaty to force the UK to leave.  There is also no timeframe as to when Article 50 should be triggered and any decision to pull the trigger will be for the incoming Prime Minister to make.  

So what happens to EU legislation once Article 50 has been triggered?  


Well, initially, it will be business as usual.  Until the UK has completed the negotiation process and extracted itself from the EU, all EU laws continue to apply, although Article 50 states that the Treaties shall cease to apply at the latest two years after notification has been given unless all member states agree to extend the period.  It is likely however, that some of the pensions legislation that was planned as part of George Osborne’s economic strategy may fall by the wayside or be put on hold while we go through this period of negotiation. 

Once the negotiation period is over and the UK has left the EU, what happens to existing pensions legislation will depend on the type of exit we have achieved.  Whether we remain also within the EEA will affect certain permissions, for example.  There are agreements between EEA countries with regards to FCA/PRA authorisations being valid across the bloc.  These would need to be renegotiated if we were to leave the EEA as well as the EU.  Passporting of financial institutions would also need to be considered.  

The Lifetime ISA (LISA)


OK, so not quite pensions legislation, but in broad terms this did come out of a consultation on pensions tax reform, and many saw it as a Trojan Horse for a Pensions ISA.  Now that the government will have bigger fish to fry, it could be that any further pensions tax reform is put on hold for the time being.  This should be welcome news to most of us in the pensions industry; it would leave a bit of breathing space after the recent onslaught of pension changes.  It could also be reassuring for your clients as although the introduction of pensions freedoms are a welcome change for many, they were also another layer of complexity for those wishing to take their benefits.  

The LISA was also criticised by some as being a deterrent to Auto-Enrolment.  Whilst HMT, HMRC and the Pensions Minister Ros Altman are all saying that the LISA is not intended to be used in place of a pension, inevitably there will be those who are saving for a house and may opt for the more immediate benefit that comes with the LISA, rather than looking over the longer term at the benefits of a pension – particularly those who benefit from employer contributions.  Perhaps a later implementation date for LISA will give those who are coming up to re-enrolment a chance to send out further educational communication with regards to the benefits of a workplace pension over the LISA and vice versa. 

Some legislation, such as the state pension triple lock may be an uncertain for the future.  George Osborne commented in the run up to the referendum that his economic plan was dependent on Britain staying within the EU.  Whether he has changed his tune as a result of the vote remains to be seen.  Whether he will still be Chancellor by the end of the year also remains to be seen.

Here is a link to the House of Commons library briefing paper published on 24th June, which brings together some initial responses regarding the implications for pensions.  http://researchbriefings.files.parliament.uk/documents/CBP-7629/CBP-7629.pdf

What Next?


Essentially, it’s now a waiting game.  Waiting to see what Theresa May’s does now, waiting to see what happens with the Leader of the Opposition, waiting to see when we will push that Article 50 button, waiting to see what happens to the legislation that has already been set in motion such as the LISA and secondary annuity market.  Early predictions of market crashes have not been quite as dramatic as some commentators anticipated but those wishing to take pensions benefits need to consider whether annuity rates will fall further. For those in or wishing to take drawdown, taking withdrawals in a market downturn may deplete the pension fund more rapidly (reverse pound cost averaging).  Suffice to say there is a lot of uncertainty, but there are also opportunities to be had.  The key as always with financial planning is not to panic or jump into any decisions, pensions in particular are about playing the long game.  

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at July 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.
 
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